What we learned about consulting robots in the last 19 months

The development of the global fintech industry is also affecting the robot consulting segment. We, in the PayOnline processing company team , translated material describing trends occurring in the global market of automated assistants, advising clients based on mathematical algorithms.

It is not news that hundreds of startups are trying to shake up the cozy world of investments with the help of solutions based on so-called robot consultants. Suddenly, the acting players did not just note them, but literally clung to this opportunity. Vanguard launched a robo platform in 2015 and today manages assets of $ 41 billion. Fidelity has launched Fidelity Go. BBVA launched a robot consultant in partnership with Future Advisor . Other companies, such as Charles Schwab and BLACKROCK , are also not lagging behind. We will return to assessing the effectiveness of each model next year, but according to some, by 2020 robots-consultants will account for more than 5% of the volume of investment portfolios. This is truly impressive and can be a tempting prospect for those in the industry. It is possible that someone will even leave warm places in large companies for the sake of their own business. But let's go back a little.

Formulation of the problem

Before proceeding further, let us dwell in more detail on some of the problems that private clients face in the field of money management and investment. First of all, if your investment budget is small, most likely you will not get very high-quality advice. In this area, the quality of counseling is directly proportional to the volume of the investment budget. And the prices have always been very high; and this either kept people from investing money, or led to not the best advisers.

It is also necessary to take into account that mathematical modeling and algorithmic simulation tools are used in large investment companies (hedge funds, etc.), but completely inaccessible to the average person. Money management, which is offered by banks, does not work as expected, which means that in the current model, where a bank account is still a source of funds, it is not viable. There are other problems, such as conflict of interest and so on.
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Debunking Myths

Many people look at the competition of new products, start-ups and long-existing players on the market as the battle between David and Goliath, where only one will remain. Consulting robots are considered to be the main competitors of financial planners. It is assumed that they will conduct online portfolio consulting based on mathematical algorithms, without resorting to the help of "living" specialists. Since their introduction in 2005, consulting consultants have won a significant share of the financial planning market and continue to move ahead confidently, setting the stage for the realization of new investment opportunities.

Currently, industry giants such as Vanguard and Charles Schwab, as well as fintech-launches Betterment and Wealthfront are leading the US robot market, which, according to forecasts, will control assets worth over 2 trillion by 2020. US dollars. In fact, robot consultants perform the same function as the specialized programs used by specialists in making investment decisions. The main difference is in exactly how private individuals ultimately invest their capital. When working with consultants, they use algorithms only as a tool at one of the stages in the process of making their own decision about investing. While the robot consultants make all decisions offline and solely based on algorithmic results.

In addition to this difference, consulting robots are able to manage only financial portfolios and cannot assist the client in matters of tax, retirement and property planning, which investment specialists successfully do. At the same time, some insist that the most important thing here is precisely the economic differentiation between live consultants and robots at the level of target markets. A distinctive feature of robot consultants is low commissions and work with small volumes, which is suitable for individuals with limited funds and a desire to invest their money.

Most likely, we are talking about coexistence. When ATMs appeared, bank employees did not lose their jobs. In fact, in the long run, as the figures show, the number of jobs has even increased. Similarly, a neighborhood of live and robotic consultants is likely to line up, as the latter have their drawbacks. Too many machine algorithms and no human component. Insiders believe that, although people like automatic functions, they would prefer to be able to communicate with a living specialist and get appropriate support, advice and answers to their questions from him.

Studies have shown that the millennium generation is unlikely to want to use a fully automated financial advisory system. According to the new GfK survey, only 10% of all survey participants said that they tend to trust computer algorithms more than a person in matters of financial consulting, while 50% of respondents disagree with this statement. In addition, 38% are willing to pay more for help from a “live” consultant, and 45% say they are not ready to abandon “live” service, even if the automated service is cheaper.

The results of the study make us think of the representatives of the segment, which is proud of its status as the best investment option for the low-income representatives of the millennium generation. But there is another study that says investment managers who manage solid assets tend to buy small companies that specialize in robotic consulting. So not everything is so bad. But can a single-industry company dedicated exclusively to robotic consulting lay the foundation for a hybrid investment advisory and management platform?

Other Challenges for Robotic Counseling

Robo-consulting is characterized by high costs for attracting clients. According to Finametrica and Morningstar , relevant companies have to spend on average between $ 300 and $ 1000 per customer. And the problem here lies on the same plane as the main advantage that makes robot consultants attractive for many investors - low commissions. Since customers pay only $ 100 a month for the services of robot consultants, the payback period for attraction costs reaches a whole year! This was the reason for the predictions that as a result, the number of players in the market of robot-consulting would sharply decline as a result of numerous bankruptcies and takeovers, and only a few companies will remain in the market - leaders in their segments. Acting players, of course, are trying to refine their business models in order to somehow cope with the problem. Time will tell how well they did it and whether it was possible to reduce the insane cost of attracting customers.

But there is good news. In May, SigFig Wealth Management LLC successfully raised $ 40 million from investors on undisclosed conditions. SigFig is a robotic consulting company that, in addition to raising funds from investors, has previously reached an agreement with the UBS conglomerate on developing a robotic platform for 7,000 customer consultants. Both events have become real milestones for the market of robotic consultants, because they demonstrate the willingness of traditional financial institutions to work with companies specializing in automated consulting and risk their money by investing millions of dollars in this business.

The industry received another impetus in May, when another company specializing in automated consulting, FutureAdvisor, began offering free online access to options such as the 529 plan (savings investment in higher education), Coverdell savings accounts to pay education expenses, UTMA programs and UGMA. FutureAdvisor hopes that this offer will attract users and the platform will be developed in this way. It is believed that FutureAdvisor is the first company in the field of robot-consulting, which offered its own plan to customers 529. It is expected that the new program will compete with traditional options aimed only at young depositors with low incomes. The company intends to offer a completely free and understandable alternative to existing programs, which are usually extremely complicated and do not give good results. Thus, FutureAdvisor plans to attract new customers.

Many who work in the field of fintech believe that robotic consulting is a great option for a target audience with low incomes who are interested in additional income that can be obtained by building their own investment portfolio with low commission costs. And although some believe that such a model has flaws, the numbers indicate that it is sufficiently successful. Until serious shortcomings have been identified, we can expect further growth in the segment. Apparently, robo-consulting occupied a very stable niche in the market. And while some small and insufficiently successful companies will drop out or be tritely bought, there is no reason to believe that serious players will face any noticeable difficulties. They conduct their activities for a sufficiently long period in order to overcome the problem of the high cost of attracting customers and receive a steady profit. In addition, Future Advisor’s attempt to enter the market for proposals related to the 529 plan demonstrates that this segment is trying to compete with traditional investors. And this is a good sign for a growing market segment. If they continue to build momentum in the target market and expand the list of offers, robotic consulting will have a great future.

Betterment, which in March attracted $ 100 million of investments in the next round, continues to grow. Personal Capital received 75 million in May. Nutmeg attracted 37.71 million this month, and Asia is not far behind. Such robot consultants as Hong Kong 8 Securities (a bot consultant named Chloe) charge no more than 1% of the assets under management for their services, while traditional companies charge at least 5%. Theo also came to the market from Japan, Bambu (B2B) from Singapore and other interesting startups. Also at the beginning of the year, BBVA Compass teamed up with FutureAdvisor to offer clients access to investment advisory services. Their example was followed by US Bancorp . And although robotic consulting services were once exclusively a Fintech phenomenon and belonged to innovative startups, today the largest players in the financial market are joining this game. We will monitor the situation and keep you informed!

Image: by Wealthbox