How Will Roboadvisors Evolve Over Time?

  • Rick Frisbie, CEO at RobustWealth

  • 17.05.2017 07:00 am
  • Roboadvisors , Rick Frisbie is the Chief Executive Officer of RobustWealth. Rick most recently served as Executive Vice President for Franklin Templeton’s multi-asset and alternative businesses. Prior to these positions, Rick served as Chief Administrative Officer, where his responsibilities included acquisitions and strategic planning. As President of Franklin Templeton's Retirement Division, he led the buildout of a business with over $100 billion in assets under management.

The advent of the roboadvisor has thrown the financial industry for a loop. Initially feared by financial advisors as the beginning of the end of human-based advice, robos are now being embraced by financial advisory firms because they realize that technological advances can enhance, differentiate and elevate their practices.

While the robo has gone mainstream, it’s still in its infancy. Consider right now to be the Model-T era of the roboadvisor. At some point, we will find ourselves in the Tesla era, but the technology and concepts are so new that it’s fair to say the roboadvisor revolution is far from over.

As robos evolve and become essential to the ways financial advisors operate their businesses and retail investors receive advice, we foresee the following changes taking place:

    1. Algorithms will get more complex and sophisticated.

The rise of big data and the economies of scale has provided developers with a much greater ease of use.

Whereas previously implementing algorithms would be labor-intensive, we now have a huge toolbox of things that allow robos’ algorithms to expand quickly and with flexibility.

Machine learning allows robos to accumulate large amounts of metadata and analysis that previously would have taken days or months. An algorithm can be put into place and then analyze and tweak an enormous sum of data to figure out its inefficiencies.

For example, my company, RobustWealth, utilizes an algorithm that is a combination of calculations that incorporates how many customers are on our platform and where we are in terms of resources.

A more advanced algorithm that incorporates machine learning will positively affect customer experience and allow developers to try out new tools and enjoy the freedoms that come through subscription-based, low-entry services.

    2. New players will enter the space.

The low-cost barrier to entry will bring copious amounts of new robos to market. That’s not a bad thing. In fact, the myth of the first mover advantage will likely eventually be dispelled; as we’ve seen in the past, oftentimes the name-brand player started as a follower and was a second- or third-adopter.  

Cost virtually has nothing to do with the proof of concept. Now and in the future, robo founders can spend $50 to $100 registering an LLC somewhere, and poof, a business is born.

Infrastructure costs have dramatically gone down and will continue to do so. Servers and data centers are now a virtual service instead of a physical item.

When RobustWealth first started, we were on a tight budget. Luckily, the costs of email hosts, computers, etc., were all on a subscription basis. Years ago, we would have needed to purchase servers that we would quickly outgrow and host our data in a data center that would cost thousands to rent per month.

It may seem like the market is oversaturated with robos, but the truth is, we will see more enter the space before the robo war winners emerge.

    3. Roboadvisors will invest in less-correlated assets.

Currently, robos limit investors’ access to traditional investments like equities and bonds. Most robos can only manage portfolios and rebalance – they’re not sophisticated enough yet to be viewed as a trading platform.

We foresee that changing. In the future, robos have the potential to become a trading platform that gives investors the opportunity to invest in less-correlated assets like liquid alternatives, commodities, municipal bonds and precious metals.

Those assets will allow financial advisors to mitigate the volatility of equities and bonds, as well as diversify portfolios, on behalf of clients.

A bare-bones robo is just setting itself up for a fall. Currently, equities and bonds are riding a bull market, but when – not if – a pullback occurs, an investor who only has exposure to two main asset classes and hasn’t diversified is going to be in trouble.

In order for robos to survive, they have to give investors the opportunity to diversify and protect themselves.

    4. Robos will take advantage of the cloud revolution.

It’s no secret that the tech giants – Amazon, Microsoft, Google, etc. – are fiercely competing against each other to dominate the cloud industry. This increased competition bodes well for small start-up robos, who will be able to access the cloud for cheap.

The cloud revolution will allow robos to do things that previously were very expensive or required a large staff, such as dynamically grow or shrink infrastructure based on the level of demand.

Previously, the technical overhead that would come with maintaining that type of infrastructure would take months and would require capital to buy new services.

Having already seriously disrupted the way consumers invest and view financial advice, the roboadvisor industry is poised to continue to evolve in order to meet investors’ demands and financial advisors’ needs. Increased algorithm complexity, the low cost for startups, a suite of investable assets and the migration to the cloud are disruptive events that will continue to shape the roboadvisor field. 

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