Technology and automation have changed virtually every sector of the economy over the past few years. From the way we shop for services, to the way we order, pay, and receive items, technology has found a way into the process. The financial sector is no different.
One of the hottest trends in the financial sector is leveraging artificial intelligence (AI) to perform tasks. Financial organizations routinely use automated software to check credit, protect identities, make payment transfers more secure, and assess risk in markets. Now more and more financial organizations are leveraging this technology in the form of Robo Advisors.
Robo Advisors — also known as automated investing services or online advisors — use computer algorithms and advanced software to build and manage investment portfolios. They allow quick investments, price checks, and quotes on time scales much narrower than humans could manage.
This technology isn’t new. It’s been used by portfolio managers since the early 2000s, and it was first offered to customers by Betterment in 2008. They emerged as a direct result of the 2008 financial crisis as financial firms aimed to simplify and democratize wealth management services with technology-first solutions. They changed the wealth management game by offering such services for a lower fee and making operational processes more efficient. Over the past decade, the technology has improved significantly, allowing for more complex tasks and services.
As a result, industry experts predicted rapid growth. In 2016, KPMG projected that assets under management would be $1.5 trillion in 2019 and $2.2 trillion in 2020. Juniper Research expects assets under management worldwide to hit $4.1 trillion in 2022. However, that is nowhere close to what’s happening, and these projections seem to have fallen off. In reality, it’s estimated to be around $600 billion.
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” Bill Gates
The adoption has just not been there with the core market— affluent investors. One of the primary challenges is generating trust in the technology. According to our most recent Local Search Report™, which was expanded this year to include a financial services section, only 30% of older affluent adults would trust using Robo Advisors compared to 70% of younger adults. That trust is generated through human contact. Six out of ten adults prefer to work with financial firms that offer primarily human services as opposed to digital ones. This has significantly limited the growth of the segment.
Many financial firms believe there is a path forward. Younger investors are a digital first-generation and are typically an underserved financial market. Over the next decade, Millennials and Gen Zers will take a more significant share of the financial advice market as their careers progress. According to Business Insider, $68 trillion will be passed down from boomers within the next few decades during the "Great Wealth Transfer." By 2030, millennials will hold five times as much wealth as they do today.
Robo-advisor services are a fit for this market segment. Financial firms who target their Robo Advisor services to them can provide an experience that generates trust and empowerment. This is something that is missing with the core market today. According to our study, Gen Zers and Millennials are twice as likely to use Robo Advisor services than older generations. This shows that younger demographics looking to build their wealth are most likely to use technology-focused services.
“Their exposure to the internet, social networks, mobile systems, AI and automation, all at an early age, make them the first generation to grow up in a hyper-digital world (most Gen Zers don’t recall the age of the flip phone),” Ashley Longabaugh, a senior wealth management analyst at the consulting firm Celent, wrote of Generation Z in a 2019 report.
If financial firms can acquire users at a young age with digital products when they're building their net worth, they can upsell them to more expensive offerings later in life.
One long-term effect of Covid-19 will be the mainstreaming of Robo Advisor services. Like many industries, COVID-19 has accelerated the digital adoption of technology. Existing Robo Advisor providers were well-positioned to transfer to remote work as they are natively built for digital communication. That resulted in an increase in account openings during Covid-19. Independent Robo-advisers Wealthfront and Betterment both reported double-digital increases in account openings according to Backend Benchmarking's Robo Report. Account sign-ups were up 68% for Wealthfront, while Betterment reported a 2020 first-quarter increase in account openings of 25% compared with the prior-year period. Meanwhile, TD Ameritrade saw new-account openings for its automated investing platform jump 150% from the same period a year ago, the study noted.
"Where Robo-advisers are fitting into the market is a bit different now than what people originally envisioned. They're not competing with traditional advice, and they are expanding the market for a wide swath of customers that were previously underserved — specifically younger customers, people who are just in the earlier stages of wealth accumulation." Backend Benchmarking's head of research David Goldstone
Covid-19 increased the need for centrally managed "autopilot" personal finance solutions. Consumers are now saving more — to address this shift in consumer behavior, wealth tech firms are creating millennial-friendly platforms that provide a more holistic suite of services and analytics tools. For example, Wealthfront is currently working on connecting clients with mortgage providers, while Betterment recently announced an addition of checking and savings products through partnerships with banks.
Incumbents, like Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo, have started their own Robo Advisor services. Goldman Sachs is the latest to join the club. Last month, they announced that they are launching an automated wealth management platform that clients can open an account with for a minimum amount of $1,000. These are all positive signs for the industry.
According to our study, 30% of adults have tried or would consider using a Robo Advisor service in the future. If this holds true, expect more growth in 2021.