Will Robo-Advisors Replace Human Representatives in Banking – How AI Is Changing the Customer Experience

Moritz Spangenberg

Mar 4, 2021 • 11 min read

As Barclays becomes the latest bank to launch a robo-advisor offering, we look at how these AI-powered advice platforms are changing the field of wealth management and ask, “could robo-advisors replace human representatives?”

Robo-advisors aren’t new – they first appeared over a decade ago in response to the 2008 financial crisis. But the market for them is growing rapidly and this presents a huge opportunity for financial services companies and fintech startups to attract customers who don’t have the time or expertise to invest on their own.

Worldwide, assets under management by robo-advisors are projected to grow from $987,494 million in 2020 to $2,487,280 million by 2024. In the same period, the number of users is expected to almost double, from 224.5 million in 2020 to 436.3 million in 2024.

And there’s compelling evidence of a need for accessible financial advice. Fifty-six percent of people feel that they don’t currently have access to the expert support they would need to start investing, according to new research by YouGov in the UK.

So what should you know about robo-advisors in the wealth management segment of the financial services market?

Let’s take a look at what robo-advisors are, how they work, their benefits and limitations, how you can get started, and answer the burning question – will they replace humans?

What are robo-advisors?

Robo-advisors are digital wealth management platforms that use algorithms to provide automated financial planning services with little to no human supervision. Over the last decade, platforms have evolved to offer more complex services such as investment selection, tax-loss harvesting, and retirement planning.

To start the process, most platforms take users through a questionnaire to assess their current financial situation, risk appetite, and future goals. The system can then create a personalized plan, provide advice, and make investment decisions to optimize the customer’s portfolio.

Historically, only clients with at least $100,000 in investable assets could access dedicated investment services from a human advisor, but robo-advisors have opened up the market, requiring relatively low opening balances and offering very low fees.

So will robo-advisors make human advisors redundant?

In a nutshell, it’s very unlikely in the foreseeable future. The role of robo-advisors is more to provide services to a segment of the market that has previously been underserved and to augment the work of human advisors.

A huge advantage of robo-advisors is that companies can offer investors professional investment management services for a fraction of the cost that they’ve been able to previously.

In the past, investors would have paid at least 1% of their total assets under management for an advisor to manage their portfolio, but now, a robo-advisor can do the same for no fee or as little as 0.25% per year.

These low fees and the ability to get started with a small opening balance means that investment opportunities are now accessible to a wider pool of customers and companies can offer much more attractive options to win their business.

Companies can also use robo-advisors to increase the efficiency of their human advisors. Using AI to automate routine administrative or monitoring tasks can relieve the burden on advisors and free up their time to focus on higher-value tasks.

Another advantage is that using machine learning to analyze vast quantities of financial data can highlight opportunities that human advisors may have missed, particularly when market conditions are changing quickly. As a result, hybrid-robo-advice,where investment managers use AI to optimize the quality and timeliness of their asset allocation and portfolio rebalancing services, is emerging as a common model.

Similarly, robo-advisors are not prone to bias or emotions in decision-making and are arguably less likely to make mistakes than a human advisor.

What are their limitations?

While robo-advisors have been a boon for the financial services industry, they do have some drawbacks.

A common criticism is that they’re not a one-size-fits-all solution to wealth management and they lack the human touch that certain aspects of financial planning rely on.

Forty percent of consumers wouldn’t feel comfortable using an automated investment platform during extreme market volatility, according to a study by Investopedia and the Financial Planning Association. This is where human advisors play a role that can’t be replicated by a machine.

For example, a robo-advisor customer may want to pull out of an investment based on a loss caused by market fluctuations, weakening their portfolio over the long-term. A human advisor, however, would be able to explain the fluctuation and reassure the customer about their overall investment plan, keeping them on course.

In addition, robo-advisors are only as good as the information they are supplied, and this is based on a limited set of questions. Models assume that customers all have the same level of understanding of investment concepts, such as risk appetite and financial goals, which may not be the case. Human advisors, on the other hand, can talk with customers to tease out the right information and help them make the best decisions.

How do robo-advisors work?

Robo-advisors use machine learning algorithms to automatically allocate, manage, and optimize their customers’ investment portfolios. Based on the data received on factors such as customers’ financial goals, risk appetite, and time frame, most platforms use Modern Portfolio Theory (MPT) to create an optimal, balanced portfolio.

Once funds are invested, the robo-advisor manages customers’ portfolios automatically. They can reinvest dividends to avoid cash drag and, when it’s time to sell investments, they can arrange transactions in the most tax-efficient way possible.

Ready solutions vs. custom solution development

If you’re thinking about adding a robo-advisor service to your business, there are three main routes to consider – build a solution from scratch, buy white-labeled robo-advisory software, or partner with a fintech startup.

Custom development offers the advantage of complete control over the final product and allows you to create a seamless, unified customer experience, but it’s the most expensive option. Also, unless you have the necessary experience and expertise in-house, it would be wise to consider partnering with a development company.

For some organizations, however, collaborating with a fintech startup may be a better approach. Often startups have the technology and capabilities to be competitive but lack the brand recognition and trust to get a foothold in the market. Agreeing a mutually-beneficial partnership can allow you to get into the market faster and at a lower cost.

And somewhere between custom development and a collaboration is the option to buy and customize white-labeled robo-advisory software. Many companies offer ready solutions that can be easily integrated and connected via API. While these still require some technical expertise to get up and running, they are far less complex and cheaper than building from scratch.

Whitelabel solutions

As the market is growing rapidly, there are many companies offering white-labeled robo-advisor solutions. Some to consider are:

Jemstep Advisor Pro

One of the first companies in the market to jump on the white-label trend, Jemstep Advisor Pro is a bank-grade digital wealth platform that spans the full advisory lifecycle.

Ideal for banks, broker-dealers, credit unions, registered investment advisors, and insurers, the platform can be customized to suit a firm’s service model, offering full control over the client experience. It can also be integrated with a firm’s existing technology ecosystem so advisors don’t lose any time learning a new system.

Empirica RoboAdvisor

An intelligent robo-advisory platform for wealth and asset managers, Empirica claims to have the strongest algorithmic engine on the market.

The platform provides an accessible way for wealth management companies to digitize their businesses. It can be used to automate processes such as customer onboarding, building and rebalancing portfolios, asset allocation, and dividend reinvestment. The insights generated by the platform can be used by firms to increase client engagement and reduce churn.

Bambu

A leading global provider of robo-advisory software, Bambu offers cutting-edge APIs and caters to businesses of every size and industry.

The company uses its proprietary software to give banks and asset managers two options – a custom-built robo-advisor or a ready-to-go system. Its ready-made product is ideal for companies trying to digitize on a limited budget, providing the opportunity to pay-as-you-go and requiring no development.

AdvisorEngine

A robust platform with CRM capabilities, AdvisorEngine allows companies to use its full platform or customize a tech stack using their existing technology modules.

Financial advisors can choose to add capabilities from digital onboarding and goals-based planning to trading and rebalancing and can add a custom or pre-built investment framework. The platform offers integrations with a range of other providers, including Salesforce, Office 365, and Quovo.

In the wake of COVID-19, the number of people wanting to invest for the first time has risen, according to Dirk Klee, CEO of Wealth Management and Investments at Barclays. “It feels more important than ever that we give people the right tools and advice to plan for their financial future,” he said following the launch of the bank’s new digital service, Barclays Plan & Invest.

Banks and financial service providers that are yet to offer a robo-advisor service are in danger of losing customers to competitors that do and risk losing out on significant new market shares and revenues in the process.

But although the AI used in robo-advisors is improving every day, success for companies will require blending the right mix of digital capabilities and traditional customer interaction. AI may be transforming wealth management and improving efficiency, but the technology isn’t yet ready to replicate the full human experience.

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Moritz Spangenberg

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