Robo-advisors are one of the most talked about subjects within the fintech ecosystem. On paper, it’s a great concept, and consumers around the world are giving them a shot.
What are robo-advisors?
A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without human financial planners. Such use similar software as traditional advisers with a focus on portfolio management and generally don’t get involved in more personal aspects of wealth management such as taxes, retirement or estate planning. Those conditions often mean lower or no minimum deposits and reduced fees.
Early adoption is strong among the wealthy
Based on a recent PwC study that polled 1,010 wealthy individuals, 13% and 23% of the wealthy (or those with at least $1m in investable assets) use robo-advisors in Asia and Europe, respectively. North America’s adoption among this group is much more modest, at 6%. An explanation for this is that perhaps the local service culture puts an emphasis on human interaction, especially if monetary investment is high … for now.
Middle-class and millennial consumers
What about individuals outside of the traditional “well to do” wealth management market? In July 2016, Betterment, the grandaddy of American robo-advisors, announced its assets under management had surpassed $5bn, becoming the first robo-advisor to reach that milestone thanks to a generous no minimum deposit and low fees. The average account balance is $29,000, while the largest amount invested by an individual is $10m. This is a big contrast with mainstream wealth management services, which often require a minimum of USD $1m in investable assets. Wealthfront, another leading robo-advisor service in the US, with $2bn in customer assets as of March 2015, reports that 60% of its clients are under 35, and 90% are under 50.
Obviously, it may take some time for robo-advisors to truly become a widely adopted service. For example, it took roughly 20 years since the 1980s for basic online banking services to get some significant traction in developed countries. I predict that millennial consumers’ adoption rate of convenient, “minimal human interaction” financial services will skyrocket once this group has more assets to invest (the next five years may prove decisive).
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