Robo-advisors: The investment advisors of the future?

I’ve just read in The Economist that more than USD 20 billion is invested worldwide in online wealth management solutions. The article not only gives the names of individual providers, it also gives a name to the entire industry: robo-advisors.

That’s great, because experienced founders say: if there’s no competition, there’s no market. But there are competitors. And there is a market. And if the industry now has a name, then it’s not just the figures that show a trend.

In its 9 May 2015 issue, The Economist added up the client funds of the biggest players in the industry. It came to a total of USD 20 billion for Wealthfront, Betterment, Personal Capital and Future Advisor in the US and Nutmeg in the UK.

USD 20 billion: that’s not a lot compared with the assets of USD 20 trillion managed by banks worldwide. But the growth is tremendous. Our young industry is growing at a speed that isn’t measured in single-digit percentage rates but in terms of doubling – and not just once a year, but every few months, as far as the number of clients and assets invested are concerned.

No wonder. Like all robo-advisors, we are much more effective in two respects than traditional solutions with human advisors.

1. Every questionnaire can listen

Any good wealth management starts with listening. But this listening is systematic; it’s part of a precisely defined process. When a human investment advisor determines your risk profile, they normally ask exactly the questions they have to ask. Namely, all of them. That’s why they work through a checklist with you, just like any conscientious pilot does before they take off and land.

But there’s nothing better suited to digitalisation than a clearly defined list of questions. (If you already have an account with us, then you will be familiar with the process. We always ask the same questions, regardless of whether you’re trying out True Wealth with a test account or starting to invest your money with us.)

2. Passive investment is more successful

The majority of active investment strategies are no better than passive ones. But passive investing is considerably cheaper. That’s why we focus on ETFs, because they’re not built around a strategy. So the investor doesn’t have to pay for a strategy. And that’s precisely why, in a long-term comparison, passive investment is more successful.

But if you can now automate the advisory services and invest with low-cost instruments, you can offer your clients two key advantages:

• Wealth management becomes significantly cheaper overall
• Wealth management is available for small investment amounts

It’s the second advantage in particular that is driving forward the growth of our young industry. The USD 20 billion at the online providers is spread across more accounts than ever before in wealth management. The average amount invested in these accounts is less than USD 100'000, and many accounts are actually much smaller. (You can start investing at True Wealth with a minimum investment of CHF 8'500.)

When journalists sense a trend, they are only too happy to exaggerate it. The Economist does this in its headline: ‘Human wealth advisors are going out of fashion.’

I’m sure we are not the only people bringing a breath of fresh air into the financial industry. Many banks are working hard to develop new solutions that will meet the expectations of their high net worth private banking clients. And many of those clients are likely to continue to rely on human wealth advisors.

If I’m pleased today, it’s above all for those to whom the doors of private banking have been closed until now. Now, with algorithms as investment advisors, wealth management for everyone is coming into fashion.

Links

• Ask the algorithm. Human wealth advisers are going out of fashion
• 5 reasons why we use ETFs to build portfolios