Robo-advice and artificial intelligence (AI) technologies are fast-tracking new investment opportunities at a lower cost than traditional investment options – disrupting financial institutions’ approach to customer interaction.
These automated platforms, which use algorithms to manage investments at a lower cost than a financial adviser or active financial manager, are expected to grow significantly as an investment option. It is forecast that robo-advisers could manage around 10% of total global assets under management by 2020, according to a study by BI Intelligence.
Gavin Smith, head of Africa for deVere Acuma, says robo-advisers are also able to identify options based on an investor’s risk and return expectations, rebalancing portfolios when needed to meet the investor’s specified requirements.
“Algorithmic trading automatically, and immediately, adjusts to new developments. Theoretically, robo-advisers should be able to constantly act to perform according to an investment mandate.”
Robo-advice can lever real-time transaction analysis for stronger portfolio management, manage risk and detect fraud by an ad-hoc analysis on large volumes of disparate types of data. Currently, the number of investment options using robo-advice is limited, although this is likely to change as it gains acceptance.
“There are many advantages to the introduction of robo-advisers and AI into the financial services sector,” Smith points out. “Lower compliance and regulatory costs help to bring down fees, speed up administration and save time.”
However, what they lack, is the ability to liaise with clients and understand the nuances of their requirements and changing circumstances. While they are providing innovative investment options, they lack newness when it comes to the big picture, that which financial advisers have.
“When it comes to understanding your goals, specific circumstances, and blending these with your retirement, tax and estate planning, robo-advisers are nowhere near to replacing good financial advice,” says Smith.
Keeping the opportunities and challenges that robo-advice offers in mind, some financial advisers are trying to marry the advantages of robo-advice and the financial advisery function.
“In a world of ultra-low interest rates and the erosive effects of inflation, it is essential that we continue to offer our clients an extensive range of cost-efficient, highly diversified solutions in order that they reach, even exceed, their long-term financial objectives,” he adds.