Digital Wealth Management: Do robo-advisors replace financial advisers?

Robo-advisors’ assets under management are approximately $3 trillion in 2020 and it will soon be over $16 trillion in 2025. What does this mean for consumers and financial advisers? Ron Miura Ryutaro, Certified Financial Planner (CFP) and a member of the Financial Planning Association of Singapore (FPAS), shares his insights on whether robo-advisors will replace financial advisers.

The pandemic has caused business disruptions while digital advancement emerged. During the lockdown period, face-to-face meetings are not allowed to be conducted. Instead of face-to-face meetings, we have no choice but to adapt to new ways of conducting business as well as to create new business models. In the financial sector, clients have started to expect seamless, personalised, and consistent service via digital wealth management platforms, including robo-advisors.

What can robo-advisors do for clients? Robo-advisors can offer algorithm-based financial advice without human interaction. Robo- advisors can allow us to execute investment portfolio planning, asset allocation planning and investment portfolio rebalancing.

Robo-advisors’ assets under management are approximately $3 trillion in 2020 and it will soon be over $16 trillion in 2025. It is apparent that the rising power of digital wealth management has squeezed many financial advisers’ revenues and even livelihood. On the other hand, some financial advisers are still sceptical that the wealth management business will not be replaced by fintech soon, as they think that human financial advisers are smarter than robo-advisors.

Let us examine the pros and cons of human financial advisers and fintech robo-advisors.

The pros of fintech robo-advisors

Robo-advisors can offer algorithmic and efficient, and low-cost financial services. Indeed, some high-net-worth individual clients are open to big tech firms like Google and Amazon serving financial services.

That is because big tech firms can take advantage of data and technology to reach clients’ needs and expectations. Indeed, “data is the new world natural resource”. After obtaining all necessary data, robo-advisors can analyze a client’s investment risk profile, financial goals, and investment time horizon to construct the appropriate investment portfolio.

The portfolio can be diversified mainly based on unit trusts, Exchange-Traded-Fund (ETF) and other financial instruments. Robo-advisors allow us to have easy access to broader professional fund managers and easier tracking to consolidated views of investment portfolios.

The cons of fintech robo-advisors

Although clients can open the robo-advisors account, clients cannot get customised investment advisory services directly from qualified advisers.

In the past few years, there was the shortest bear stock market in 2020 and rebounded strongly within one year. If another bear stock market hits in the near future, there is no recession-proof yet of how robo-advisors can handle market volatility as well as clients’ urgent expectations. It is not clear how robo-advisors can offer tailor-made advice and flexible requests to understand clients’ emotions and communication nuances.

Although the rising popularity of digital wealth management platforms has been evident in the past few years, this does not always mean human financial advisers are no longer relevant to clients.

The pros of human financial advisers

They have real working experiences and a down-to-earth approach to finding a holistic solution. Even though robo-advisors are getting popular and influential among investors, human financial advisers can free up more time to focus on higher value-added services.

This means it’s now time to change the business model from a product-focused sales pitch to become financial coaches with a holistic approach and solutions.

There may be some young investors who have no clue about financial planning and investing knowledge as school and parents do not teach financial literacy. DIY investing does not guarantee higher returns on investment so it may be hard for them to take the first move.

As a new model, human financial advisers can complement digital wealth management tools while understanding and addressing clients’ situations and financial goals.

The cons of human financial advisers

Financial adviser fees tend to be more expensive than robo-advisors. Sometimes there might be administration errors caused by advisers.

Some financially savvy investors might not like tedious procedures and several numbers of paperwork required, such as face-to-face meetings and conducting risk profiles, investment time horizons, filling out the application form etc.

Amid the cost pressure of compliance and hiring human financial advisers, the market shares of robo-advisors are increasing.

Furthermore, big financial institutions like DBS have invested in robo-advisory platforms to improve their profitability and enhance overall customers’ experiences. It seems to be obvious that human financial advisory-based business especially under the mass market category might be eroded by the rising power of robo-advisors if they don’t take action to change their present business model. 

A holistic approach

In conclusion, qualified and customer-focused financial advisers will still be in demand despite digital wealth management platforms becoming the new norm.

A one-size-fits-all sales approach like a product-focused sales pitch will no longer meet clients’ emerging demands and higher expectations due to the regulatory requirements and emerging fintech competitors.

To manage clients’ expectations and enhance customers’ experiences in the new post-pandemic era, wealth management firms need to be facilitator to multiple channels, such as tax planning, trust planning, international migration planning and legal services.

Moreover, human financial advisers need to reskill and upskill the level of their professional competence to stay relevant. They need to focus on the tasks that robo-advisors cannot do effectively, such as strategic financial planning, cross-border estate planning and intergenerational succession planning. These three areas are complicated, and clients still need to have customized advice.

Bear in mind ‘’holistic approach’’ is the key for a new model of financial advisers. Although digital wealth management platforms are emerging and disrupting some financial advisers’ livelihood, it is advisable for financial advisers to supplement a digital wealth management tool effectively.

To survive in the new business norm, financial advisers need to be adaptable and agile to new digital skills and develop specialised skill sets to address customer demands and goals.

This is a FPAS x Money Playschool collaboration.

The article “Digital Wealth Management: Do robo-advisors replace financial advisers?” – by Ron Miura Ryutaro, CFP, first appeared in Financial Planning Magazine, a FPAS publication.

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