Utilization of Robo-Advisory Services Is Anticipated to Climb Over the Next Decade

The COVID-19 pandemic had a big effect on the world of wealth management, especially on how market participants, from small investors to fund managers, thought about investing in a physical environment that was often very limited. And because of this and the fact that financial companies are still putting a lot of effort into digitalization, robo-advisory should do well for the rest of the 2020s.

Social-distance rules that were put on people, families, and businesses meant that face-to-face interaction took a back seat over the last few years while digital activity, like meetings between advisors and clients or the actual process of investing, took the lead. And since robo-advisory is best for people who like to do things online, it shouldn't be a surprise that this area of asset management has been doing well lately and is expected to keep doing so for the next ten years.

For those who don't know what robo-advisory is, it's an online service that helps people manage their investments with little or no human input. Instead, robo-advisors give you digital financial advice that is best for you based on algorithms. Data scientists and quantitative financial engineers at the robo-advisor company typically create the always complex algorithms.They are used to figure out the best portfolio allocation based on the customer's preferences for investment risk and return. They are then run by software, so there is almost no need for a human advisor.

It is also important to remember that robo-advisory first came to the forefront after the 2008 Global Financial Crisis (GFC). This is when companies like Betterment and Wealthfront started using algorithm-based portfolio-allocation methods as a cheaper and more convenient alternative to traditional asset-management services.

As the idea grew over the last 10 years, it became clear that this type of investing was better for smaller and often younger retail investors who wanted a well-diversified portfolio but might not have had a lot of time, money, or even experience to build it (or use a traditional asset manager to do so). Shelleen Shum, senior forecasting director at Insider Intelligence and eMarketer, said in June 2021, "Robo-advisors were able to serve customers who had not been served before, like younger investors who are just starting to build wealth." "Robo-advisors are also appealing because, thanks to algorithms, they can often make changes to investments faster and in real time."

As retail investors have moved more quickly to online wealth management services, the robo-advisory world has grown in size and scope to match. Investment platforms from banks, fintechs (financial technology firms), and digital start-ups now offer highly customised automated investment services. For example, in May 2020, the asset-management unit of Singapore's largest bank, United Overseas Bank (UOB), launched UOBAM Invest, a robo-advisory service that offers corporate customers a "customised portfolio based on your company's investment goals, risk tolerance level, and investment horizon."

In fact, the fact that banks, asset-management firms, and other financial institutions have built robo-advisory into their business plans shows how popular automated, algorithmic investment services have become. This growing industry is expected to grow a lot over the next few years because it can offer customers things like tax loss harvesting, low-cost fees, and smart, efficient decision-making.

That being said, not everyone is as excited about robo-advisory as you might think. A recent report from wealth-management analytics firm ParameterInsights found that US investors used robo-advisory services less in 2022 than in previous years. Instead, investors with a lot of money seem to be going back to traditional advisors who offer full-service financial planning. According to the report's numbers, the number of people who used digital advisors dropped from 27.7% in 2021 to just 20.9% in 2022, which is a drop of nearly 25%. "Self-directed investors who are having trouble not only have to deal with high transfer costs, but also don't know what the value of digital advice is compared to self-directed approaches," ParameterInsights said. "As a result, companies are missing out on chances to help many different types of customers who need advice badly during the market turmoil."

And when it came to their assets, investors who made the most money were the least likely to keep using robo-advisors to manage their investments. Those making less than $50,000 used robo-advisors 3 percentage points less, while those making between $50,000 and $99,999 used them 14.2 percentage points less. And the number of people using robo-advisors dropped by a huge 23.8 percentage points among those making $500,000 or more. "These high-net-worth customers have been targeted by traditional advisor channels and are being drawn in with full-service financial planning," the report said. It also said that younger investors were more likely to stick with their digital advisors than older investors. Also, women were more likely than men to keep their robots.

Given this alarming drop, it shouldn't come as a surprise that more and more financial companies are streamlining their robo-advisory operations. Morgan Stanley and Fidelity Investments, for example, have recently merged their platforms. In October, Morgan Stanley said that it would move its Access Investing robo-advisor business from its Core Portfolios to E*Trade. In the same month, Fidelity also said that it would combine its robo-advisors, Fidelity Go, and hybrid personalised planning and advice. The company said, "At Fidelity, we are always changing our services to meet customer needs." " With this change, we will extend the benefits of Fidelity Go to younger and newer investors by not charging an advisory fee for accounts under $25,000. We will also offer personalised planning and advice to investors with accounts over $25,000 at a lower price, which includes coaching and planning.

And while it's clear that some robo-advisors have been successful at making money and helping their clients, others have not. This, in turn, raises questions about how different robo-advisory services perform since the level of personalization, engagement, and human involvement can be very different from one to the next.

"Some studies show that robo-advising makes portfolio allocations better, cuts down on wasteful spending, and helps people better manage their debt and pay less in interest and fees on their debt accounts." "Robo-advisors have the potential to level the playing field between wealthy and vulnerable households in personal finance, especially for people with low levels of financial literacy," Francesco D'Acunto, associate professor of finance at Georgetown University's McDonough School of Business, and Alberto Rossi, professor and director of the AI, Analytics, and Future of Work Initiative at McDonough School of Business, wrote in an article for Brookings on October 5. "At the same time, the good effects are not clear-cut and all-encompassing." Some robo-advisors that help people decide how to invest have been found to make investors trade too much. Some are too expensive compared to how much they help their users. It looks like the success of different robo-advisors, just like the success of human financial advisors, depends on how they are set up.

Still, since digitalization will be a big part of how financial services change over the next few years, many people think that the robo-advisory industry will continue to change and grow a lot. Grand View Research's late-August market analysis, for example, said that the global robo-advisory market, which was worth $4.13 billion in 2021, would grow at a compound annual growth rate (CAGR) of 29.7% from 2022 to 2030. The report said that much of this growth will be caused by the widespread use of digital technology in the financial sector. This will "enable users to get investment advice from robo-advisors using tech-enabled analytics."

According to the report, the rapid transition from traditional investment services to robo-advisory investment services was a major factor in growth, and the massive effects of the COVID-19 pandemic will continue to drive growth significantly until 2030. The global demand for digital financing, robo-advisors, financial planning solutions, and investment management has gone up because of the pandemic, the report said.