As technology continues its seemingly endless evolution, robots are taking over customer service and back-end data analysis. Combining those functions to create robo-advisors makes perfect sense.
Unconvinced? Look at the financial sector. Experts who weighed in as part of Financial Planning’s survey believe that wealth management firms will continue to invest in robo-advisors and financial mobile app development as the two most impactful technologies. That’s not surprising, considering that robo-advisors are experiencing an estimated annual growth rate of 45.7 percent.
Major questions remain before that growth can happen, however. Anyone operating in the financial field is subject to a slew of regulations — and robots are no different. Banking rules range from onerous to inexplicable, and companies must remain constantly vigilant to stay compliant. Unfortunately, these same regulations are stifling a robot renaissance.
Numerous Obstacles to Ubiquity
The Financial Industry Regulatory Authority (FINRA) remains opaque regarding many of its rules. Between navigating an endless sea of regulations and reporting requirements, would-be FinTech disruptors must clear plenty of hurdles to achieve any success.
Startups might be used to breaking rules and moving quickly, but established institutions and regulators prefer the profitable status quo. When the status quo shifts, they find creative ways to retain market dominance via half-steps.
Wells Fargo, for instance, recently launched its own robo-advisor platform. While the progress is positive, the company requires users to deposit at least $10,000 to open an account with that service. The high cost to open and the associated fees for the service — which do not exist in human-managed options — indicate that Wells Fargo and other large banks would prefer to keep their customers in traditional relationships for now.
As robots work to catch their big break in the financial services industry, regulatory red tape and slow industry progress present the biggest obstacles to adoption. As robo-advisors reach more audiences, the utility of the technology will encourage the market to invest further and force regulators and big banks to accept the new robotic reality.
The Natural Evolution of FinTech
While they seem like recent disruptors, machine learning and artificial intelligence have operated behind the scenes in finance for several decades. Black box trading, common on Wall Street, describes how software engineers program algorithms that complete trades in fractions of seconds (earning massive sums on thousands of lightning-fast trades). High-frequency trading is a great example.
An algorithm that skips the line on the trading floor has a steep advantage. If someone can buy shares of a stock for $19.95 and then sell those same shares for $20 a few minutes later, that profit doesn’t mean much — unless that buyer makes thousands of those transactions on a daily basis.
In this way, traders already use AI to pick stocks for their portfolios. Similar to analysts, machine learning and AI gauge factors like dividend growth ratios to make smarter decisions. These algorithms even account for tendencies in management teams and other soft variables.
FinTech companies can’t just crash the scene and expect a warm welcome, though, even if their products would make people wealthy. FinTech startup Ripple Labs got hit with a $700,000 fine in 2015 for skirting regulations in the name of progress, for instance.
Fortunately, most companies are doing things the right way — and the big banks are hedging their bets. Wells Fargo’s first foray might not be perfect, but it’s a start. Fifth Third Bancorp and Fidelity recently started working together on an automated investment service. Ally Bank, an online-only financial institution, offers automated investing to its clients. Betterment is the largest robo-advisor firm with $13.5 billion in assets.
Whether regulators and industry titans like it, the robots are coming. Before these cutting-edge tools can have the most positive impact, though, a few things need to change.
How to Prepare for the Robot-Focused Future
Robo-advisors are here to stay. As the technology powering them improves, they will continue to refine their offerings to entice customers with better service, higher returns, fewer fees, and superior service.
Estimates from Deloitte suggest that “assets under automated management” could reach a staggering $7 trillion by 2025 (up from $2 billion in 2016). As the amount of money that robo-advisors manage continues to grow, the financial services sector must make changes in the following areas:
1. Corporate Strategy
If customers can lean on robo-advisors to manage their personal portfolios, large firms could realistically use automation to manage trillions of dollars in corporate accounts. Modern companies continue to rely more heavily on data every year, and they recognize the importance of data in their investment strategies. It’s only natural that these companies should also prefer an AI-powered, data-fueled approach to their investments.
2. Low Barriers to Entry
At this point, Goldman Sachs won’t take a private wealth management account worth less than $5 million. Robo-advisors democratize that personal touch, lowering the barrier to entry for less affluent people who still want individualized financial help. This race toward lower fees will force financial services companies to diversify their income streams if they want to remain profitable.
3. Retirement Management
Robots can do more than help people save for retirement. Once customers reach retirement, AI can help those users optimize their withdrawal strategies. Bucket Bliss recently debuted a robo-advisor to help its clients reach their post-retirement goals and keep their income streams consistent and sustainable. As more people are willing to put their money in the hands of robots, this type of retirement management will become more common — meaning retirees will expect banks to offer comparable services.
The robo-advisor revolution has already begun to disrupt the way investors engage with their accounts. From small-time savers to billionaires, more investors at all levels will continue to lean on automated assistance as time passes. If the FinTech industry hopes to meet that consumer demand, regulators and major players must clear the way for disruption.