Table of contents:
- What is wealth management?
- What are robo-advisors and how do they work?
- What does it mean for today’s financial advisors?
- Advantages and disadvantages
- Our top picks
- What does the future hold?
What Is Wealth Management?
The term “wealth management” is one of those that is thrown around very often, but yet most professionals struggle when asked to explain what it means.
But believe it or not, it is not quite as complicated as some people make out. From the perspective of an affluent individual, wealth management is the science of enhancing one’s financial situation and status.
From the perspective of a financial advisor, wealth management is the ability of an advisor or a team of advisors to be able to deliver a comprehensive range of commercial products and services to a client in a consultative manner.
In theory, a wealth manager can offer their clients every single financial product that has ever existed, but the reality of the matter is that a wealth manager will tend to specialise in a particular service or product that they feel most comfortable with.
Another defining feature of a wealth manager is that all advice is delivered in an entirely consultative manner meaning that wealth managers are genuinely client-centred and they have no hidden agenda about the types of products that they will suggest for each.
A good wealth manager will ask lots of questions and will take the time to get to know the client, understand the person and find out what is important to them and why.
Then the manager can seek to bring in the suitable experts and solutions, as well as suggest the appropriate products applicable to each.
What Are Robo-Advisors and How Do They Work?
A robo-advisor is a type of financial advisor that can provide financial advice or investment management advice online with minimal human contact or interaction.
They can offer a range of digital financial solutions that are base on algorithms or mathematical rules that they have been pre-programmed with.
These algorithms are facilitated by specially designed software and therefore do not need the input of any human advisor. The software is also able to utilise its algorithms to automatically manage, optimise, and allocate the assets of its clients.
At the time of writing, there are currently over 100 robo-advisory services and robo-based investment and wealth management is considered a breakthrough in the sector.
Bonuses of this type of operation include the fact that services can be brought to a much more comprehensive audience with a much lower cost when compared to the more traditional method of human advice.
A robo-advisor can allocate a clients assets based on the risk preferences and desired target return that is specified beforehand. They can allocate assets such as bonds, stocks, futures, commodities, real estate and cash, and these assets can also be directed towards ETF portfolios.
A client can specify whether they want to benefit from passive asset allocation techniques or active asset management styles. The very first robo-advisor was launched back in 2008, just after the financial crisis gripped the world economy.
In 2010, an entrepreneur called Jon Stein launched Betterment which led to a marked increase in the popularity and trust of robo-advisors. Then in June 2016, a robo-advisory known as Wealthfront announced its collaboration with the Nevada State Treasurer to offer a 529 plan for college savings plans for students.
Come 2017, Bettlement raised $70 million of financing to fund its progression in the field.
Currently, robo-advisors are most common in the US, but their popularity in Europe is on the increase. They also enjoy a certain amount of popularity in Australia, India, Asia, and Canada where Bmo smartfolio and Wealthsimple are examples of successful robo-advisors.
When it comes to how they work, the tools they use to manage a customer’s portfolio differs very little from the portfolio management software that is already used across the sector. The main difference is the distribution channel which is used.
Up until recently, portfolio and wealth management was conducted purely through human advisors and lumped together with other services and products.
Nowadays, customers have access to portfolio management tools in the same manner as they have access to brokerage companies and stock trading platforms thanks to the internet.
The traditional method of providing wealth management services left many middle-class investors out in the cold as they were unable to afford the services or the minimums imposed on investable assets.
With the use of robo-advisors, the minimum investable amount can be as little as One British pound and the fees charged are considerably less. This means that wealth and investment management services are now open to a much broader section of society.
What Soes It Mean For Today’s Financial Advisors?
The march of the robo-advisor is undoubtedly keeping today’s financial advisors on the tips of their toes. Many are wondering and panicking that they may be about to lose a lot of their businesses to what is essentially nothing more than a computer algorithm.
But are these fears well founded I hear you ask? The answer is yes.
The wealth management industry is worth more than $27 trillion – a genuinely unbelievable amount of money and one which robo-advisors are slowly chipping away at.
These web and software-based advisory firms are becoming increasingly appealing to investors who believe that advice shouldn’t cost so much and that the industry should be more accessible to all.
Such online platforms typically work by asking their new clients a series of questions about their finances and wealth, goals, tolerance for risk, and more. Then using a sophisticated computer algorithm, they can recommend a series of choice, moves, and strategies that are perfect for each investor.
There is no doubt that these robo-advisors have a whole host of benefits for those looking to invest. First of all, they can be accessed any time of day or night, 365 days a year. Secondly, they are much cheaper to operate than a human advisor. Therefore the cost to use one for the client is significantly less.
With a robo-advisor, there is no risk of human error, bias, or fraud as everything is controlled via an algorithm. This gives customers more confidence in the advice given and creates a better overall customer experience.
While there are going to be clients that are happy to use a robo-advisor, there are always going to be clients that prefer to speak to a real human being. Also, it is likely that the more assets and wealth the individual has, the more likely they are to want to speak to a financial advisor, rather than trust a computer with their fortune.
So yes, there is no doubt that robo-advisors will take a chunk of business away from, the traditional model of wealth management, there will remain some clients that will always prefer to speak to a person, not a computer.
These are the sorts of customers that won’t care about paying a little extra in fees, because let’s be honest when it comes to investing billions, what is a few extra million for peace of mind?
Advantages and Disadvantages
When it comes to pros and cons, which ones apply to you will depend on what sort of person you are, what kind of portfolio you have, and what your goals are.
If you are a small time investor or someone just starting out, the fees are super low when compared to a human advisor. This means that not only do you spend less, but you can even invest less as well with minimum investment amounts of around $500 in some cases.
Some people will also appreciate the fact that you can speak to a robo-advisor any time of the day – there is no need to book an appointment and wait around for someone to get back to you – you can log on and start right away.
They are only as personalised as the information you put in. While you can set your goals and edit them as accordingly, sometimes some people prefer to discuss their fears and hopes with a real person.
There are also some limitations when it comes to specific actions. For example, it is not always possible to sell call options on an existing portfolio, and you may find it difficult or impossible to buy individual stocks with a robo-advisor.
Our Top Picks
Here are some of our suggestions for the best robo-advisors out there.
This is one of the leading robo-advisors on the market. With over $10b in assets under its management, they trade through the Apex Clearing Corporation. There is no minimum account balance for its digital or standard plan, and it also offers top-tier assistance for those that require it.
It provides automated tax-loss harvesting, and they offer a combination of low-fee stock and bond index funds. They also offer retirement planning as well as account types such as IRA, 401K and even trust accounts.
This robo-advisor also offers access to a human advisor as well.
With over $5b in AUM, Personal Capital also allows users to connect their bank accounts to the platform so that they can track their saving, spending, and even retirement savings as well as the overall portfolio performance.
While this platform does have slightly higher fees than some of the other options out there, it is worth it if you are looking for a diverse selection of wealth financial planning tools.
These guys are well known for the fact that they have a zero fee structure, and instead they make their money from management fees on ETFs.
While having an account is free, there is a minimum deposit of $5000 which is one of the highest out there when it comes to robo-advisors. This is a goal based platform that will ask you for a lot of information regarding risk and goals before creating a custom portfolio based on your response.
If you are someone that is already using an online broker to manage your investments, then SigFig is an excellent choice for you.
It allows you to keep your existing investments if you already have holdings with TD Ameritrade Holding Corp, Charles Schwab Corp, or Fidelity Investments, and the robo-advisor will create a tax-efficient, intelligent, and diversified portfolio for you.
Similar to other advisors it requires you to fill out a lot of information on risk and what you want from your portfolio and will then present you with the best options. The minimum balance is $2000, and the account fees are approximately 0.25%.
This is another leading platform with over $7.5 billion in assets under its management. The account is held at Apex Clearing Corporation, and Wealthfront makes investments on your behalf.
The minimum investment is $500 which makes them super affordable, and there are no management fees for accounts less than $10,000. There are no trading fees applicable, and the mutual fund fees are a low 0.12%.
What Does The Future Hold?
There is no doubt that the future is exciting for robo-advisors. As chatbot technology becomes more and more advanced and the skills and conversational abilities of the tech improves, so will the popularity of the robo-advisor.
As mentioned above, although some people are always going to want to speak to a human being, there is always going to be a large number that will prefer to interact with a chatbot/robo-advisor on their terms, and for less money.
We expect to see a shift of clients and assets to robo-advisor service providers over the next 12 months, as well as the wealth management market becoming more open to a smaller value and more casual investors.
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