In a country as diverse as India, with around 125 million middle income professionals, robo-advisory holds tremendous potential, reveals a Cafemutual – EY report titled ‘Winds of change: Wealth management reimagined’.
This is because traditional advisors have faced difficulties in growing scale as reaching clients beyond top tier cities has been a challenge. As a result, the large underserved population would benefit from the presence of robo advisors, states the report.
As the prevalence of rob-advisors has increased globally, these platforms have also made their way to India. With the advent of these large-scale low-cost algorithm-based automated services, high quality asset allocation and investment guidance can be made available to all segments of investors.
Adapting robo advice
The report suggests that traditional advisors can develop their own robo-advisor platforms in-house to effectively capitalize on this opportunity and target both existing as well as new clients. However, in-house deployment can come with its own set of risks, such as high costs of development.
Alternatively, traditional advisors can develop these capabilities by partnering with existing robo advisors. This will enable the incumbent firm to adapt quickly and result in lowering of costs, minimization of risk and limited organizational changes. However, there could be several challenges, such as cultural issues and conflicts in terms of ultimate goals.
Challenges galore
There may be certain cultural issues in proliferation of robo-advisors in India as in the US as many Indian investors are not open to online investing and there may be a lack of trust in terms of recommendations made by digital wealth managers. Moreover, there is also a lack of widespread financial literacy in India and many investors themselves are not completely aware of the basics of investing and risk. Another challenge in the effectiveness of robo-advisors is the lack of reliable data available to develop robust algorithms and execute a credible financial plan for an individual based on particular financial goals and risk characteristics.
Potential impact of robo-advisors on the wealth management space
Some traditional players have been downplaying the impact of robo-advisors. However, these new digital entrants have been able to develop a streamlined digital experience for clients, which had been largely lacking in traditional wealth managers’ digital offerings. This, combined with increased transparency and lower fees has the ability to make wealth advice economically feasible for the mass market.
Robo-advisors are swarming into the wealth management industry. The current market share of robo-advisor firms is marginal as they have only gained a miniscule share of (AUM) globally but several companies already have over US$1b of assets under management. Several research studies forecast that robo-advisors are going to witness significant growth going forward as these firms have managed to do in a couple of years what the incumbent wealth management industry has failed to accomplish since its inception, i.e., make quality financial advice available across demographics at an affordable cost.
Robo-advisors will be key to unlocking access to the mass market services, which, in turn, would help in growing the overall wealth management market. Moreover, these firms have received strong funding support from venture capital funds. According to a study by MyPrivateBanking Research, hybrid robo-advisors are expected to grow by size to US$3.7 trillion of assets globally by 2020. The study predicts that the total market size for hybrid robo-advisors will further increase to US$16.3t by 2025, which will be 10% of total investable wealth around the world by that date.
In contrast pure robo-advisors (fully automated) are likely to hold only 1.6% of the total global wealth by the middle of the next decade.
Robo-advisors’ steps to streamline the client online experience, provide greater transparency and improve the economics for the mass segments are irreversible and they are making traditional financial advisers rethink their business models. According to a research by Accenture, robo-advisors could result in possible fee reduction of as much as 70% for some services. Traditional advisors will need to ensure that their service offering is commensurate with the fees tagged to it. Moreover, robo-advisors will also force traditional advisers to increase focus on their digital channels.
Edited excerpts from Cafemutual – EY report ‘Winds of change: Wealth management reimagined’.
