While the concept of robo-advice has already gained significant attention within the wealth management industry, robo advisors serve as a means to enabling lower fee and better outcomes, and not an end onto itself which could replace traditional banks.
Despite all the hype, we believe human wealth managers won’t be replaced by cyborgs any time soon. In fact, the majority of high-net-worth investors continue to use traditional banks for managing their investment portfolios. Robo should be viewed as a means of enabling lower fees and better outcomes and not as an end unto itself that will replace traditional banks altogether. Here are four key reasons artificial intelligence (AI) doesn’t stand up to human intelligence — at least not yet.
The total assets under management for these digital disruptors represent less than 1% of all managed account assets (approximately US$10 billion of US$4 trillion1). More important, most articles about robo-advisory fail to mention that the business model is dependent on scale: Earning only 15–35 basis points of the assets under management in fees, they operate at a fraction of the traditional private banking fee model of 100+ basis points. Say a robo-advisory business has US$100 million under management. Fixed operating costs would take up most of the fees earned — leaving only US$150,000–US$350,000 in gross revenue. It is difficult to imagine sustaining such a small, standalone operation in flush market like Singapore or Hong Kong. Many firms are simply failing to scale to the size of large global firms like Wealthfront or Betterment.
Robo-advice, by definition, promises more efficiency and transparency when compared with the discretionary management of investment offered by the traditional private banking relationship manager. However, the perceived advantage would be difficult for robo-advisors to maintain given that private banks have begun investing heavily in using algorithms similar to those in robo to provide comparable efficiency and transparency.
Clayton Christensen, Harvard Business School professor and author of the The Innovator’s Dilemma, argues that innovation rarely comes from large incumbent players. But as with other disruptive innovations, the emergence of robo-advice has served as a wakeup call for the large incumbents of the wealth management industry.
“Technology can be an enabler for creating more compelling choices, grounded in solid investments rationale, and increasing investor control.”