Should wealth managers fear robo-advisory?

With the increasing uptake of ChatGPT and other AI chatbots that use natural language processing, wealth managers would be forgiven for wondering where the shift to automated advice will leave them in the value chain.

However, the experts whose opinions FSA canvassed reckon that the increasing penetration of wealthtech and robo-advisory in particular will not displace traditional wealth managers but will instead complement their existing skillset.

In recent years, robo-advisers, backed by powerful AI algorithms, have emerged as a popular alternative to traditional wealth managers, raking in billions of dollars in assets under management and democratising the wealth management industry.

Global asset managers have been quick to jump on the bandwagon, striking up partnerships with wealthtech firms, buying them outright or in some cases even seeking to build their own ventures.

Just this year, for example, one year on from acquiring a stake in wealthtech provider Moneyfarm, M&G launched its first robo-advisory platform, &me.

However, robo-advisory remains underpenetrated currently. According to Asia-based digital wealth management platform, Endowus, whereas in Hong Kong and Singapore, 49% and 62% of respondents to its Wealth Insights Report 2023 are already using online brokerage platforms respectively, only 21% and 26% are using robo-advisers currently.

This should provide a long runway for the increasing penetration of robo-advisory, while the recent success of ChatGPT will also provide a timely boost.

In May, CNBC reported that JP Morgan was developing a ChatGPT-like software service that uses AI to select investments for customers, known as IndexGPT, citing trademark filings.

ChatGPT has the potential to turbocharge robo-advisory given that existing models have been based instead on a much narrower data set and one where owners find it difficult to ensure that there are no inherent biases.

There are several other factors that should count in robo-advisers’ favour. One of the most obvious advantages is that robo-advisers usually have much lower fees.

For example, Michele Ferrario, CEO and co-founder of Asia-based robo-adviser StashAway, told FSA that management fees for their portfolio typically range from 0.2% to 0.8%, which compares favourably with traditional financial products that charge between 1.2% and 5% annually.

“High fees, inaccessibility and a lack of transparency have long plagued the traditional wealth management industry,” he said.

These views were echoed by Steffanie Yuen, managing director and head of Hong Kong at Endowus, who also said that Endowus prioritises funds that are in more competitive share classes such as the institutional share class to bring down the overall cost of investing.

The other major factor that counts in robo-advisers’ favour is that they significantly widen the accessibility of the industry, providing the type of tailored and personalised investment advice that traditionally has only been available to high-net-worth and ultra-high-net-worth investors.

However, several experts that FSA spoke with noted that the traditional advisory model becomes more important when clients move further up the wealth spectrum as the limitations of robo-advisory become apparent around more complicated questions such as estate planning or how to reduce tax liability.

This is reflected in most surveys. According to a joint report from EY and Singapore-based Navigator Investment Services in December last year, more than seven in 10 investors prefer speaking to personal advisers when making investment decisions. Meanwhile, at the higher end of the wealth pyramid, only 6% of ultra-high-net-worth investors prefer digital-led relationships.

Similarly, according to a St James’s Place survey of Hong Kong and Singapore investors, which was published in November last year, 46% of respondents said they preferred visiting a professional financial adviser when it comes to long-term investment and financial planning compared to 19% that prefer using robo-advisory platforms.

“Investors continue to value the human elements of financial advice and this reflects the emotional nature of investing,” said Oliver Wickham, Asia partnership director at St. James’s Place.

“We believe traditional wealth managers will continue to play a significant role in the industry, particularly for clients with complex needs that may require human expertise such as estate planning or intergenerational wealth transfer.”

Overall, experts agreed that robo-advisory would not supersede traditional wealth managers but would complement them. The financial advisory industry has faced many purported technological threats over the past several decades, but none so far have signalled the death knell for the advice industry and instead have helped to make financial advisers more productive.

“Combining the reach and tech-enabled capabilities of digital platforms, with the relationship and client base of traditional wealth managers will create synergies that allow a wider group of clients to be served more efficiently in terms of product access and cost,” said Endowus’ Yuen.

These views were echoed by Ramprasad Sandilya, vice president for wealth management at Broadridge.

“As technology continues to evolve and becomes more mainstream, robo will become less of an alternative investment choice for investors and more of a compendium choice – just as discount brokerage became a compendium service to traditional wealth accounts,” he said.