The rise of robo-advisors: The end for wealth management firms?
Investing one’s hard-earned money has always been a personal affair, one that comes with a lot of responsibility and consideration. To meet this demanding responsibility, traditional investment advisors have always been there to help guide the wannabe investor, providing an invaluable and mentoring human service.
If we follow modern trends, however, this could soon come to an end, replaced by cold, calculating machines offering you financial advice.
With AI and technology continuing to bolster business and finance across the globe, robo-advisors have been gaining ground in international markets.
The Middle East, however, is slowly discovering the benefits of these so-called robo-advisors, algorithm-based programs that help users manage their investments.
According to a recent report by Michael Fahy for Zawya, a UAE-based robo-adviser fintech company called Sarwa is gaining traction in the country, raising upwards of $1.3 million from confident investors.
This raises questions, however, as to the future of wealth management. Could it lie solely in the realm of the digital and automated? Or is there hope left for traditional advisors?
Sarwa’s rise is indicative of the future
Sarwa’s recent round of fund-raising is quite telling of a growing sense of confidence in the role of robo-advisors in the market, especially given that the company was founded late last year. With these automated advisors still relatively new to the region, like Wahed Invest, one of the world’s first Sharia-compliant “robo advisers,” the wealth management sector is due for major changes.
According to Statista, robo-advisors are already managing funds equal to $618m in 2018 worldwide. This number is expected to show a whopping annual growth rate (CAGR 2018-2022) of 45.7%, resulting in the total amount of $2.78 billion by 2022.
Currently, the number of users enlisting the services of robo-advisors totals 58000, an 86% year-on-year increase. By 2022, this number is expected to amount to 249,500.
Sarwa, which means wealth or fortune in Arabic, could very soon grow from an innovative startup to a major force in the region in a matter of a few years.
The company recent round of funding saw many “high-profile venture capitalists [invest] including Middle East Venture Partners (MEVP), 500 Startups and Saudi Arabia’s Hala Ventures, among others,” Fahy writes for Zawya.
Wajdi Ghossoub, an associated director of MEVP, said, “Sarwa is adapting regionally a model that Wealthfront and Betterment have mastered in mature markets and the opportunity is ripe given the large segment of the population that is young, affluent and interested in investing.”
Wealthfront and Betterment are the big names in the global automated advisor sector, and the innovators of this business model, which saw an opportunity following the 2008 financial crisis for a new kind of wealth management.
The allure of robo-advisors
Quite frankly, the rise of robo-advisors should come as no surprise. Wealth management firms have long been reserved for the rich and affluent.
Small-time investors on the lower end of the financial spectrum were left to fend for themselves, with no professional advisor to guide them. Robo-advisors rose to cover this gap in the market, allowing even the smallest of investors to get the help they need in managing their investments.
Investment Zen classifies the minimum investment sum that qualifies for the services of a robo-advisors at around $500 in the US.
“An account of $500 would be shown the door fairly quickly at a traditional advisors office – so robo advisors have a clear edge here with their ability to provide professional actionable advice at scale offering smaller investors access to quality advice previously outwith their reach,” Investment Zen explains.
Some of these fintech firms even offer their services for an investment as low as $1 in the US, or £1 in the UK.
Another advantage these automated advisors have over their human counterpart is their relative “omniscience.” A robo-advisor can send you a phone notification in the matter of milliseconds were a certain stock to drop or rise in price, informing you that it is allocating your funds accordingly. These advisors are interconnected to the vast web to keep track of every little nudge in stock values, and are available to provide you an unfaltering, 24/7 service.
If you are still unsatisfied with your robo-advisor’s assessments, human advisors are also available to provide you with a more human touch, taking into consideration nuanced, real-world influences on the market, such as political tension and underlying trade feuds.
Is it over for traditional advisor firms?
Not really. While a robo-advisor is a great piece of innovation, it currently still does not replace the experience and advice of an industry veteran, especially when managing investments that total in the hundreds of millions, or even billions.
Recent research from Insight Discovery noted that 49% of financial advisors in GCC countries were upbeat about the prospects for robo-advice, even if only 35% of them saw it as an opportunity for their businesses in 2017, a GCC Wealth and Asset Management 2017 report by Ernst & Young noted. Meanwhile, 22% of those surveyed saw robo-advice as a threat to their business.
In fact, it seems that the future of wealth and asset management is neither purely automated nor traditional, but a mix of both.
“Adapting early to the new reality will open the door to profitable future growth opportunities,” says George Triplow, EY MENA Wealth and Asset Management Leader. “The leaders will be those who harness blockchain, automated-advice, artificial intelligence and robotic process automation. The recent focus on particularly for crypto in the region set the scene for a dynamic landscape for institutions moving forward.”
“Going forward, we can expect to see a large number of asset managers and independent advisors partnering with skilled technology firms that are able to optimize robo-advisor technology much more efficiently than they could do in-house,” Triplow continued.