Humans and machines: The rise of robo-advisors in the investing world

The relationship between humans and machines has captivated people for years—from robots that can win Jeopardy to those that can sense human emotions, the list is endless.

Today, however, machines are no longer simply a novelty. The rise of analytics and artificial intelligence (AI) has become a key component of a business’ success. In the banking world, there are many examples to point to: self-service tellers, automated loan processing, payments, etc. But there’s one in particular that is fascinating—the robo-advisor.

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Managing personal investments and wealth has traditionally been left to the experts—a team of wealth advisors and managers who met annually with clients. Robo-advising, the process of providing automated, algorithm-based portfolio management advice, is changing that.

Robo-advising first began in 2008 and has become a de facto way of working for certain parts of the financial sector; however, in the investment community it’s coming into its own and promises to create a totally new, transparent experience for investors. So far it’s working; assets under management by robo-advisers are estimated to increase 68 percent annually to a staggering $2.2 trillion in five years.

2 opportunities for robo-advising

How will it grow so quickly in five years? We see two opportunities: robo-advisors are put directly in the hands of individual investors, and banks and wealth managers are creating robo-advising products to supplement existing services and offerings. Let’s break each of these opportunities down.

According to a report by Pew Research Center, millennials are now the largest generational labor segment, which arguably makes them the largest investor group. This generation has grown up banking on the go; these folks are used to checking accounts or making a payment via an app. They’ve lived through the financial hardship of the 2000s, which for some has resulted in a negative connotation of “big banks.” Their comfort level with technology and their desire for transparency and control makes an automated investing tool a logical next step in their financial journey.

Robo-advising start-ups, e.g. Betterment or Wealthfront, are capitalizing on that interest by offering low management fees and personalized portfolios to suit the needs of the individual investor. These start-ups are cloud-native, which means they can scale their infrastructure quickly to meet consumer demands. They’re also designed specifically for robo-advising, so unlike big banks, they’re not creating a new product or service on an existing infrastructure. 

The robo-advising challenge for traditional banks

For traditional banks and financial institutions, robo-advising presents an interesting challenge. It adds a layer of efficiency and automation to the investing process, but it also competes with traditional business models. Solving this challenge lies in finding the right relationship and balance between human advisors and robo-advisors.

Banks today are in the process of developing their own robo-advising products or services. Bank of America Merrill Lynch announced the launch of Merrill Edge Guided Investing, Wells Fargo is planning for a 2017 robo-advisor launch, and Charles Schwab has its Schwab Intelligent Portfolios product. What’s unique about each of those is they give investors the benefits of automation, support and insight from wealth managers. This allows banks to cater to the demands of each generation of customers, whether it’s a tech-savvy millennial or a baby boomer planning for retirement.

There’s another benefit for banks: Robo-advisors provide human wealth managers with real-time analysis on market trends, stock moves and more. These insights, delivered at scale, help wealth managers play an active role in creating a smart, proactive investment strategy for their customers. It also enables increased transparency, something customers are demanding from banking and financial institutions, and creates a new type of engagement between the customer and the bank. 

The next year will bring new product announcements, partnerships and acquisitions as start-ups and banks capitalize on robo-advising to deliver the best service possible.  And as the development of AI and machine learning capabilities continue to be refined, there will be a direct, positive impact on robo-advising. These advancements will help robo-advisors mature in 2017; they’ll become more sophisticated at managing the relationship between investor and wealth manager and find ways to interact with investors through voice capabilities, similar to Amazon’s Alexa.

We can also presume that the traditional role of wealth manager will change; they will leave the number crunching to the robots and focus on being a resource to their customers and providing data-driven guidance and advice. And for the banking industry, that is the true beauty of how humans and machines can work together to achieve something special for the customer.