Robo-advisors in the Fintech Industry


A robot is a technology or technology-enabled process that can perform functions previously only performed by persons. Increasingly, robots are discovering ways to provide support also for financial services. A research report published by the investment bank Morgan Stanley in November 2015 predicted that several European financial institutions would pilot Robo-advisor (or simply robot), many collaborating with startups as the most cost-effective way to perform this.

Fintech companies have been disrupting the financial services industry with innovative products and services, but also with technological innovations able to revolutionize the traditional organizational paradigm. One of the leading innovations in this field is virtual robotics. This technology, in its applications to the financial services industry, takes mainly the shape of financial Robo-advisors. The New York Times defines Robo-advisors as a definite class of financial advisors that provide online services with “minimal person intervention.” Even though Robo-advisors could support wealth management services until now they have been mainly used for portfolio management. Some US Robo-advisor startups have already linked up with established companies. Investment giant BlackRock bought FutureAdvisor, while Betterment is collaborating with financial services group Fidelity on a service for institutional investors.

On the other side, robots can help in process automation. This section analyzes these interesting developments for fintech startups and traditional financial institutions alike, called robotic process automation (RPA).

Virtual Robotics
“About 50% of today’s service jobs will be taken over by computers” This is a statement in one of their most recent reports developed by the consultancy company PricewaterhouseCoopers. A multitude of economics schools has looked, with some concerns, at organizational changes. This means a period when organizational structures, together with their elements, undergo significant changes and transformations. It is necessary to open the mind to understand the implications of an organizational change within the boundaries of a business organization.

Today, mainly persons provide financial advice. Digital applications could provide advice. The complete underlying process—from its generation to the delivery— is radically different. Furthermore, the person’s brain will never be able to work as an algorithm (and vice versa), so the contents of the generated advice will seldom be the same, at least for the time being.

The key differentiation lies in another factor, that is, the underlying cost structure. Many economic scenarios suggest that the use of digital solutions may significantly reduce costs and, in some cases, be more effective. Robo-advisors could revolutionize the delivered value proposition.

A financial services company could offer affordable services, reaching different markets and gaining new customers. This is a way to make mass services of private banking and insurance.

According to a report developed by the consultancy company EY, the advice is indeed to go virtual. New entrants have been revolutionizing the market by simplifying the user experience and lowering fees, contextually developing new models that allow them to reach uncharted patterns.

Robo-advisors in the Fintech Industry
It is interesting to analyze some of the most relevant fintech startups that have built their business upon Robo-advisors and automatic procedures, managing to reduce costs and to gain a competitive advantage on traditional financial institutions.

The Future of Virtual Robotics
Robo-advisors are reshaping the financial services industry, especially in the wealth management and portfolio management areas. The reason why this is happening is simple: fintech companies have been leading the way of new business patterns, anticipating trends and putting their customers at the center of their strategies.

The approach followed by these companies is consistent with the model presented in this book. These companies have been largely showing a forward-looking attitude by implementing disruptive technologies, by focusing on digital channels, and by exploiting the use of appropriate automated resources.

These companies have reached an enlargement of the customer base by significantly reducing the costs of the delivered services, thanks to automation. They have also adequately enforced marketing campaigns to spread the brand and the services toward new customers and markets.

The future developments of Robo-advisor companies are clear. These business organizations are perfect examples of disintermediation, even though their customer base is still poor when compared with larger banks and wealth management branches.

Traditional organizations are not passively observing the market. Some of them are continuously involved in activities aimed to narrow their technology gap. The tools are always the same: innovation labs, business incubators, business accelerators, and acquisitions.

More than in other areas, fintech companies have been successful in disintermediating traditional financial organizations; this could be identified as one of the main reasons for which acquisition has been chosen by a multitude of financial institutions as the best way to fill the technological gap. About this last element, one could expect a period of acquisitions and partnerships. For instance, very recently, money management giant BlackRock has acquired Future Advisor, a fintech company delivering financial advice through the employment of investment algorithms.

Even though automation is the future, Robo-advisor companies should carefully take into consideration critical challenges. Not all customers prefer the automated nature of these solutions. Millennials, most likely, have often been target customers. Most of the traditional high-net-worth customers more likely to prefer face-to-face relationships and meetings over fully automated processes, therefore continuing to choose the old and traditional methods.

The biases represent another issue. Modern economic theories are at the base of Robo-advisor algorithms. Although they are still a valuable financial planning tool, there are still difficulties in the assessment of short-term strategies, even when they have their merits.

Fintech companies successfully countervail these challenges. Expect that fintech initiatives will compete with traditional companies with more and more advanced robots.

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