By Moriah Costa on 6th January 2017
Large financial institutions are embracing the brave new world of financial technology, investing in robo advising firms and spinning off advisors of their own.
Wells Fargo, Allianz, and UBS were among the bigger financial institutions in 2016 that invested in disruptive robo advice firms, as banks gain confidence in the growing sector.
Robo advice is the name given to low costing online wealth management and financial advice that uses automated algorithms to allocate investors' assets into model portfolios based on a questionnaire analysing risk tolerance as well as other factors.
It is one of the leading financial technologies and is expected to grow dramatically over the next three years. Consulting firm A.T. Kearney expects robo advisors to manage around $2 trillion in the U.S. alone by 2020.
The larger financial institutions, more commonly associated with active investment management, are better poised to succeed in the robo space, with bigger budgets, brand recognition, and access to clients, several analysts say.
“I believe it is fair to say that big players – or incumbents – are already taking over the robo space,” said Bartosz Golba, senior wealth management analyst at Verdict Financial.
Allianz bought an estimated $7m stake in robot adviser MoneyFarm in September. The Italian startup has raised nearly $30m since it was founded in 2011.
Wells Fargo announced in November that it was partnering with San Francisco-based robo advisor SigFig Wealth Management LLC to create a digital platform in 2017. The American company also partnered with UBS Group AG America’s wealth unit to develop technology for investments for the bank.
SigFig was also the recipient of $40m of funding from a variety of sources, including UBS Group AG and Banco Santander SA’s InnoVentures fund.
In August US Bank partnered with giant asset manager Blackrock’s robo advising company, FutureAdvisor, to create digital financial advice for clients.
While the bigger players are dominating robo advising, Golba expects robo startups to continue launching.
“Startups are far better than incumbents at ‘innovating’, so they have a vital role to play in the industry,” he said. Collaboration with bigger firms is the best way for start-ups to develop, he added.
William Trout, senior wealth management analyst at Celent, thinks that start-ups with direct consumer models are “dead in the water” due to the high cost of acquiring clients and difficulties of charging for automated services.
“They cannot compete with the brand power or even the resources available to UBS and larger financial entities,” he said.
Wealth management is shifting from a focus on robo advising to the human advisor, with automation being used as a supplement, said Trout.
“I think there's a sense that automation of portfolio management really needs to exist at the service of the advisor,” he said.
Other banks joined the digital revolution by creating their own robo advisors. UBS offered its digital service SmartWealth to some UK clients in November before it rolls out in 2017. Barclays also created an online investment platform in November.
In June, Santander UK launched a digital investment service that gives clients access to around 2,000 funds.
Global wealth management leader Fidelity Investments also created its own type of robo advisor in July, called FidelityGo. The biggest difference is that the money is managed by a human, with users managing their money via an app or online.
London-based wealth manager Killik & Co is creating its own robo product called Buzz but a launch date has not been set. The firm is also launching Silo, an automated service geared towards low-income savers, in early 2017.
Some UK banks are considering robo advising but have not yet made a commitment. Richard Anderson, head of pensions policy at Lloyds Bank Private Banking said robo advising could be a solution but does not think it will replace face-to-face interactions.
The Royal Bank of Scotland launched an online platform for clients in late 2016 but denied it was in anyway a robo adviser. The government-owned bank cut 220 face-to-face advisers in a move to cut costs.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.