The robo model of investing is very much on the industry's mind these days, prompting plenty of questions. How can investment firms and advisers best use automated investing technology? Will a robo approach
threaten the traditional personal advisory relationship? Could it actually render the adviser irrelevant?
I'd like to include in this discussion another crucial player: the client. The potential benefits of robo investing to client financial literacy are abundant. Anything that promotes
better client understanding of the investing process, and the financial options available to them, should be a boon to the client-adviser relationship and augment the personal advisory approach.
The most basic fact about automated investing is that it's real, is growing rapidly, and it's not going away. The robo market experienced an 83% boost in assets under management in the 15-month period ended July 2015, according to
a Corporate Insight study. But that's just getting started: a study from research firm Cerulli Associates projects that the robo-adviser industry
will grow 2,500% to $489 billion under management by the year 2020.
A number of factors are behind this growth, but at its most basic is the fact that people today want to be better informed about their buying choices in virtually every business transaction. Some 81% of adults browse the web for product information, and once they've done their homework, 67% prefer shopping online, according to “The New Multi-Screen World” study by Google. And almost half of U.S. adults manage their finances online, according to the Pew Research Center American Trends Panel survey, conducted in October 2014.
Complementing this trend is how people are expressing their need for greater financial literacy. The American Psychological Association's “Stress in America” study found that 71% of Americans say money is their leading cause of stress, while the National Foundation for Credit Counseling, in its 2015 “Consumer Financial Literacy” survey, says 75% of these same folks feel they could benefit from professional help in understanding financial questions.
Robo investing increasingly is satisfying these needs. Investors can immediately see how assets are allocated based on their goals, and how portfolios are automatically rebalanced over time and changing circumstances.
Financial advisers can see all this as a threat, of course. But in reality, greater client financial literacy and engagement with advisers is a win-win for everyone. The challenge and opportunity is in building and reinforcing trust in a business where, let's face it, trust is its most important product.
(Related: 5 client trust builders you've never heard of)
PREPARING FOR THE FUTURE
The millennial generation—asset management firms'
next, best array of clients—is a particularly appropriate demographic when considering how the nexus of automated investing, financial literacy and trust best work. The younger set, while admittedly digitally savvy, has just as strong a need for financial literacy as everyone else. According to Wells Fargo's “Millennials and Money” study, 70% of millennials wish they had learned basic investing in school.
For these investors, robo technologies can provide a crash course in portfolio optimization based on investing goals and objectives, and in the process do away with much of the mystique of rates, yields and the rest of the “tribal language” of investing.
As younger investors, armed with this financial literacy, build their asset base they'll inevitably gain a greater appetite for more professional guidance. With greater literacy, these and other investors will gain an enhanced comprehension of financial advice and options, and feel more engaged with their advisers as a result.
(More: The services millennial investors really want)
As this happens, advisers can spend more time cultivating high net worth clients, with robo technology providing a double check on their financial advice. All clients can better understand what they're paying for, monitor their portfolios along with their advisers, and even offer recommendations themselves.
This is the essence of the robo discussion: How financial advisers can be more realistic about an emergent technology, and thoughtful about how it fits into their business model.
I'll go a bit further: Robo investing is causing asset management firms to up their game in order to work with a more financially literate and engaged audience. This entire discussion is about the future of financial advice, but it's also what all professionals and businesses are dealing with, as technology opens up vast swaths of knowledge to buyers in every industry. In the process, they're coming to grips with the question: Is the increased transparency afforded by today's technology promoting trust between client and adviser, or is it hindering it?
Businesses of all stripes are putting greater emphasis on their true differentiators, trust and transparency. For the world of asset management, robo solutions represent one more way for client investors and their advisers to make this happen.
Michael Spellacy is the Global Wealth Management Leader at PricewaterhouseCoopers.
