Market Overview
Robo-advisors are digital systems with little or no human oversight for automated, algorithm-driven financial planning services. Robo-advisor is a program that lets investors use less human interaction to control their funds, accounts, and investments online. An online questionnaire gathers all relevant information, such as investment timeline, risk tolerance, and returns concerning consumer savings.
Recent developments in machine learning (ML), artificial intelligence (AI) and neural research promise to revolutionize the business models of various industries. Complex tasks handled by humans have often been automated and are thus vulnerable to errors. The need to manage wealth in digital ways has paved the way for the growing demand for Robo-advisors that use preset algorithms to sort customers based on their risk-management capabilities. Thus, Robo-advisors deliver predefined and low-cost Exchange Traded Funds (ETFs), primarily in the financial sector. The emergence of Robo-advisors has been observed to minimize wealth management costs. These advisors help to build a consumer portfolio, automate rebalancing, and collect tax losses. The robot-advisors market can be segmented based on the automation mode into fully automated and semi-automated. In contrast, the market can be divided into tax-loss harvesting, retirement planning and investment advisors, wealth management, business-to-business Robo-advisors and personal financial advisors based on services.
Key Findings
To understand the market trends of Robo-advisors, we conducted a survey in April 2021 with industry experts and financial services executives. Some of the key findings of that survey are as follows:
Robo-advisors are having the most adoption across the Banking sector, followed by Asset Management/Wealth Management, and Insurance.
Most Impacted Sectors
Top three critical capabilities of robo-advisors are Portfolio Management, Risk Profiling, and Rebalancing Investment Portfolios.
Benefits of Robo-Advisors
Top three critical capabilities of robo-advisors are Portfolio Management, Risk Profiling, and Rebalancing Investment Portfolios.
Critical Capabilities of Robo-Advisors
Market Dynamics
Key Drivers
Key factors that are driving the growth of the Robo-advisors market are as follows:
Increasing Need to Compete with Traditional Advisory Systems:
The global Robo-advisor market's primary driver is the absolute benefits of Robo-advisors to allow automated algorithm-based management of people's money. Several small investors can now use Robo-advisors to track their portfolio's progress since they are available at low starting rates, deliver competitive returns and are transparent, remarkably different and creative compared to the financial services sector's plans.
Raising Awareness of Digitalization among New Generation:
In various emerging economies, observers have found that current and future generations are familiar with technology and prefer digital tools. In addition, financial advisors' companies are increasingly embracing emerging innovations as they can help them efficiently represent a wider community of customers over time.
Growing Internet and Smartphone Penetration:
Due to the rise in affordability and accessibility with low financial assistance fees, growing internet penetration, and advanced technology, the Robo-advisor market is expected to experience a strong growth rate. Rising competition from new entrants and diversified services is one of the critical reasons anticipated in the coming years to increase the demand for Robo-advisors at a high pace.
Challenges and Restraints
Some of the critical challenges that are restraining the growth of the Robo-advisors market are:
Rising Risk Profiles and Dynamic Consumer Behavior:
On the flip side, the lack of direct interaction, personalized customer service, and the rise in risk profiles due to dynamic variables such as retirement and income are a few factors that prevent the demand for Robo-advisors from achieving their true potential.
Rapidly Changing Business Dynamics:
One of the most significant factors expected to restrict the demand for various Robo-advisors in the coming years is the concept and suitability of financial advice alongside customer interest conflicts. Besides, the market's growth worldwide is also threatened by the robustness and transparency of algorithms and customer disengagement from business models.
Impact of Technology
Technology plays a significant role in any industry's growth, and the financial services industry is no exception. Emerging technologies, including big data analytics, artificial intelligence, machine learning, and intelligent automation, drive the need for global Robo-advisors.
Big Data Analytics:
Big data and predictive analytics greatly expand the reach of Robo-advice, integrating financial planning with broader retirement planning, tax planning, holiday savings, and planning for higher education. Typically, Robo-advisors have targeted the millennial market because these young investors want to save and multiply money more rapidly and sometimes do not have enough time and resources to merit a human advisor's attention and interest.
Intelligent Automation:
The online and automated investment tools positively impact their wealth manager's advice and decision-making. Robo-advisors use automated algorithm-based schemes to provide portfolio management advice. With customer-centric thinking, such digital services are created, keeping customers at the core and building technology based on customers' needs. Intelligent automation technology opens the market up to new possibilities as it becomes more available to individuals, a method that is becoming more common for many financial institutions. With new digital technology, such as sleek applications and fancy interfaces, Robo-advisors have a robust user experience. Such platforms ensure that they blend in with your regular online browsing and are great options for new investors. It is also suitable for individuals with a clear financial plan who need an affordable, simple place to start their retirement plans. Wealth Front & Betterment are two famous Robo-advisors available today that are focused on commercial fees. WiseBanyan and Charles Schwab are making the soil in the free category.
Artificial Intelligence (AI) and Machine Learning (ML):
With the progress in Artificial Intelligence and machine learning technologies, Robo-advice can become highly customizable and specific. Advice from robots is here to stay, and it has its place in tomorrow's wealth management landscape. But with Robo-advisors, what's lacking most is the personal touch. In this age of hyper-personalization, one area where Robo-advisors can fall short is the lack of a human element. The Robo-advisor can't replace the trustworthy old age advisor with whom your elders have served, who lives nearby, and who knows you and your family can run right over in case of need.
Conclusion And Recommendations
The Robo-advisor market is generally attractive but dominated by some global and established players. There are fewer entry barriers to the market. Moreover, the market is growing exponentially due to the advancement in technologies. Robo-advisors can encourage more advanced investing strategies within a population not used to accessing financial advisors because of their low cost and simple accessibility. This has attracted the untapped market, such as households with relatively lower incomes or younger people, who may not invest because their investment funds are too small and are located far from urban centres. The conventional financial advice model doesn't work in the case of Robo Advisors. The Robo does not have an office where a customer goes in and speaks directly to an advisor. Thus, personal communication is missing, hence the lack of hesitation or trust in the investment process.
Here are some of our recommendations for the Robo-Advisor market:
- For Robo-advising, personalization is essential. Companies who tailor their offerings should expect an improvement in revenue and purchases and improved consumer loyalty and satisfaction. A little goes a long way.
- Financial institutions can implement a feedback system to consider the customer's viewpoint.
- Chatbots should also deal with the regional languages, helping expand the market in Tier 2 and 3 cities.
If you want to sell call options on an existing portfolio or buy individual stocks, most Robo-advisors won't help you. The algorithm can be exercised, which can alter depending on the stock market, and then a sell call decision can be undertaken.
