Automation: shaping the future of wealth management

Robo advisors to open up managed investment funds to more people.

Digitization is making the world a more convenient and streamlined place to do business. This is forcing financial institutions to come up with any place, anywhere services that will help them beat off competition from emerging fintechs. Wealth management has been quick off the mark with robo advisors to satisfy the on-demand needs of digital customers and open up new market opportunities.

Robo advisors are online services that use algorithms to automatically perform many of the investment tasks that are usually performed by a human financial advisor. The general approach is to assess risk tolerance, and possibly customer goals, and come up with fund portfolio options based on the robo advisor assessment. They also have the power to automatically rebalance portfolios to maintain targeted asset allocations and provide tax-loss harvesting.

Using robo advisors, wealth managers can reduce the cost of managing investments, and therefore lower their fees and provide a lower starting point. The intuitive interface offers more transparency for investors and they can easily track and analyze how their investments are performing.

Financial institutions believe the simplicity, affordability and accessibility of robo advisors will rapidly open up the wealth management market to smaller, entry level accounts who have up until now been underserved. It will also have high appeal to millennials and the tech savvy who like the privacy offered by an online solution or who would never consider engaging a financial advisor. BI Intelligence predicts that by 2020, robo advisors will manage $8 trillion globally.

Robo advisors

A hybrid picture

Financial advisors will remain central to wealth management for the foreseeable future, with a preference for a hybrid model emerging among bank customers, according to IDC.

“We are seeing more robo fintechs riding on the success of mass market investors and expanding to launch their premium versions with access to human advisors,” explains Sneha Kapoor, senior research manager at IDC Financial Insights. “Secondly, traditional players, which continue to have human advisors, are starting to embrace the robo advisory model for support.”

Clients still look for the human touch when it comes to hand-holding through difficult markets. But robo advisors will provide invaluable automation in areas such as client on-boarding and predicting investments that will appeal to clients, which will save time and dramatically increase financial advisors’ productivity.

Digital transformation cannot be avoided

Financial institution CIOs can increasingly see that their old business models and existing value propositions will not be sustainable in the future. This was one of the key conclusions of the Gartner 2018 Agenda Survey. It is therefore essential that financial institutions disrupt their own businesses, before they are disrupted.

As part of their transformation strategies, financial institutions are seeing the necessity of moving to the cloud to take advantage of its agility, flexibility and potential for lower costs. This is in part being driven by open banking and the European Union’s Payment Services Directive (PSD2), which gives third parties access to customer data with consent that was previously only available to banks. The aim is to put the customer at the epicenter of every transaction.

By moving the front end of their system to cloud, financial institutions can scale as required, integrating into their core legacy systems. Cloud allows financial institutions to tap into software-as-a-service to quickly innovate and provision new services on a pay-as-you-need basis with no vendor lock-in.

Orange Business and leading developer of wealth management software, Additiv, have developed a new cloud-based version of Digital Finance Suite (DFS 4.0), which will help digitize new and existing financial segments. The platform addresses the financial industry’s requirements for hosting data off premise in the cloud, but onshore in the country of origin. This is achieved by leveraging the strong cloud, data storage, connectivity and cyberdefense capabilities of Orange Business.

“The functionality for a robo advisor will not change if it is on or off premises. But by putting it in the cloud, it is secure and far faster when it comes to deployment, support and getting product to market,” explains Michael Stemmle, CEO of Additiv. “Our robo advisor offering has the potential to open up a mass client segment that can be activated by automation.”

“There has been a lag in the financial industry to move IT solutions off premise, due to such considerations as security and regulations. But thinking has shifted – banks can now see the cloud offering a real space for growth and opportunity,” explains Martin Kull, managing director Orange Business, Switzerland. “Our joint offering with Additiv comes quickly on the back of this trend.”

An automated future

Robo advisors are beginning to disrupt the wealth management sector due to their ability to provide a personalized service at a low enough cost that banks can scale rapidly. According to forecasts from BI Intelligence, automated financial advisor apps and services will manage around 10% of all global funds under management (FUM) by 2020.

In the future we will see robo advisors advance to deliver dynamic advice using machine learning and artificial intelligence (AI). For the moment, however, robo advisors will remain very much half-machine and half-human financial advisor.

Find out how Orange and Additiv have partnered to offer investment funds via a cloud-based wealth management solution that includes robo advisors, client and advisory dashboards and portfolio management.