FinTech Disruptions: Robo-Advisory in Wealth Management

FinTech innovations outside of cryptocurrencies and blockchain.

Aaron Ngo
Michigan FinTech
5 min readFeb 16, 2018

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Introduction

Financial Technologies, or “FinTech”, is an emerging field at the intersection of financial service and new technologies. FinTech companies utilize cutting-edge technologies to provide new and better financial services to consumers and businesses. While there are many startups do specifically focus on financial technologies, it’s important to know larger companies have FinTech initiatives as well (e.g. Bank of America, JP Morgan, even Apple and Amazon).

FinTech Firms utilize cutting edge technologies to provide new and better financial services to consumers and businesses

One example of FinTech technologies are cryptocurrencies, which have dominated headlines for the past year. However, cryptocurrencies do not cover the entirety of FinTech. In fact, the crypto and blockchain spaces represent a very small fraction of financial technology. We wanted to highlight some of the other ways technology is disrupting traditional financial services and helping to provide better products to both consumers and businesses.

CBInsights FinTech Trends to Watch in 2018

FinTech includes payments companies like Paypal and Venmo, peer-to-peer lending companies like Lending Club, personal finance companies like MoneyLion, and even platforms like TurboTax. Even larger companies like Apple have gotten into this field with services like Apple Pay.

In this article, I wanted to highlight some more examples of how specific financial services are being affected by technology. I decided to start with Wealth Management, specifically how innovations like “Robo-Advisory” are changing the industry.

What is Wealth Management?

Wealth Management is providing financial and investment advice and services for high-net worth individuals. Rather than coordinate with multiple different people and firms, these individuals can contact wealth managers for a holistic approach to help them with their financial needs. This can include retirement planning, insurance planning, portfolio management, etc.

What is Robo-Advisory, and what is its effect on the Wealth Management Industry?

A visual representation of a robot providing financial advice to clients (note: most robo-advisors are not physical robots, unfortunately). Image taken from Barron’s.

Also known as “digital advice platforms”, Robo-advisors are automated digital platforms that provide financial and investment management advice using algorithms. After collecting information from an individual(s), robo-advisors give advice on how to best proceed or some may automatically make the appropriate financial transactions for you.

Image taken from invesorjunkie.com

Robo-advisors have actually been around for a few years now. However, they began using their algorithms and providing advice behind the scenes to the wealth managers themselves, who used that as supplemental information before giving their final recommendation to clients. However, as robo-advisors become more efficient, wealth managers are able to focus less time on investment management/data entry, and more time on building client relationships. This is key because of wealth management is very reliant on the relationships they create (the industry is very similar to consulting in that way). Tech savvy advisors, on average, have 40% more AUM (assets under management) and serve 55% more clients. Digital advances have raised the standard of customer service in the field, because clients can now talk to an advisor (albeit a digital one) 24 hours a day.

Limitations

  • Relatively little differentiation: Robo-advisors tend to be relatively easy to replicate. Because of this, it’s difficult for firms to differentiate their services (although they can spend more on additional asset categories and more sophisticated technology).
  • Job Enabling vs. Job Replacing Tech (This one is probably a good limitation): A few years ago many feared that robo-advisors could replace humans. Now, there’s consensus that robo-advisors will simply enable human advisors to focus more on client engagement, decision making, and relationship building. Though, there are still skeptics.

Interesting Companies

Here are a few wealth management companies who integrate have integrated robo-advisors. I chose to highlight some startups and some larger traditional finance institutions, to show that FinTech is being utilized at all companies of all sizes in a variety of ways. Please note I’m mentioning these companies to give readers a concrete example of how robo-advisory is being used, and this is not an official endorsement in any way.

  • Betterment- an online web and mobile platform that provides customized personal finance advice such as retirement planning. With an easy to use interface and a focus on long term investing, Betterment is one of the hottest startups in wealth management.
  • Wealthfront- is a startup offering digital services to help users plan for retirement, invest their savings, or plan to buy a new home. With a simple, low, and transparent advisory fee of 25 basis points, Wealthfront makes wealth management easily accessible and understandable. Wealthfront is one of the leading startups in wealth management with over $7 billion AUM as of August 2017.
  • Fidelity Go- Fidelity is a multinational financial services corporation. Their digital personal finance solution, Fidelity Go, helps advise those who wish to gain investment advice at a lower fee. Fidelity Go simply collects information such as your risk tolerance, age, etc and makes recommends investments. It’s completely up to you if you wish to invest or not (though they will update you on your investments regardless of your decision).
  • Vanguard Personal Advisor Services- Vanguard is an American investment advisor, and their platform Vanguard Personal Advisor Services is a digital platform that utilizes robo-technology. Though opening an account requires a higher initial investment than other robo-advisors, their features may make up for it. With portfolio rebalancing algorithms to reduce risk and boost returns and automatic deposits for convenience, Vanguard is often mentioned as one of the leader’s in the wealth management space.
A market breakdown of investment and wealth management startups (note startups like Robinhood do classify as investment management, just not exactly the type I talked about in this article)

Further Reading

  1. CB Insights: FinTech Trends to Watch in 2018
  2. The Balance: What Is a Robo Advisor and How Do They Work?
  3. Investopedia: Wealth Management
  4. Wealthmanagement.com: How FinTech is Shaping the Future of Wealth Management
  5. CFA Institute- FinTech: Revolutionizing Wealth Management
  6. BusinessInsider: Vanguard Personal Advisor Services Review
  7. Michigan FinTech: FinTech Apps for College Students (Part 1)
  8. Michigan FinTech: FinTech Apps for College Students (Part 2)

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Aaron Ngo
Michigan FinTech

Student @ University of Michigan | Writer for Michigan FinTech