Robo advisors to manage 2.2 trillion portfolio by 2020

23 June 2015

Robots are set to transform the investment advisory landscape, forecasts a new research from A.T. Kearney. Through leveraging the power of Artificial Intelligence, Robotics and Analytics, an exploding amount of assets under management is expected to be placed in ever more competent metal hands. If the projections from the consulting firm are in the right ballpark, by 2020 robo-advisors will manage about $2.2 trillion in assets.

Rise of the robots
More and more business consultancies are projecting the effects robotic workers may come to have on different industries, as well as the wider social consequences of traditionally human jobs being replaced by droids. Aecus for instance recently found that robotic process automation is already implemented at 32% of businesses, with 44% more planning to deploy the technology in the coming three years. The potential benefits are considered to be massive – another study by rival Alsbridge expects that, with the help of robots, clients may be able to achieve a 60% reduction in the cost of many IT services. The new is not all positive though; a further recent research by Deloitte and the University of Oxford found that up to one third of UK jobs might disappear in the near future as a result of robotics, with the wide spread social and economic consequences still needing to be carefully considered by stakeholders. 

AT Kearney - Robots

The places where robotic workers are set to pop-up is ever increasing, with even fields that appear insulated from the threat, like medicine, soon to be augmented with technologies like IBM’s Watson Health, an Artificial Intelligence (AI) that is able to perform basic consultations. However, while the robot doctor is still out, with the health technology still to be proven – other advisory fields are seeing the rise of robotic advice, including financial advisors.

Robo financial advisors
In the coming years, robotic financial advisors* may come to have a significant role in asset management. According to a new study from A.T. Kearney, the assets under management in the US managed by robots will grow from $300 billion to around $2.2 trillion by 2020, which represents a CAGR of 68% annually over the coming five years. Around half of the assets will stem from already invested funds, while the other half will find its way from non-invested funds. This will represent a sizeable segment of the total investment market in the US, with robots managing 5.6% of US investment assets by 2020, up from just 0.5% today.

Estimates US robo-advisors assets under management

Robotic advantage
One of the advantages of the new technology is a removal of the middle man – according to the report, one need never talk to another human being, with communication between client and robot completed through digital channels.

Another advantage of the upcoming robotic advisors is that they do not discriminate on the wealth of those with whom they interact, thus, while seasoned human investment advisors are looking to help your father with his hefty investment portfolio, and they tend to ignore new entrants to the investment market. Pricing is another key consideration. One robotic investment advisor, Wealthfront, has 90% of its clients under the age of 50, with 60% under the age of 35. And while its services are more expensive for lower investment amounts, the minimum investable amount of $5,000 carriers with it a fee of 0.35% up to $10.000, with 0.25% fee for funds between 10,000 and 100,000. Considerably cheaper than the 1% - 4% fees sometimes charged by ‘real life’ financial professionals.

Robots - Pricing

One further thing the robots are skilled in is cutting tax bills by selling securities at a loss to offset future capital gains taxes. The basic idea is to lessen the effects of the tax hit on a winning stock as well as minimising the blow of a losing stock. These ‘tax harvesting’ technique have long been the remit of those with deep roots in the industry, and while tedious, the capacity for robo-advisors to access these techniques is something middle class and new investors can start taking advantage of.

* A.T. Kearney defines robo-advisors as providers that offer automated, low-cost, investment advisory services through web-based and/or mobile platforms. The service was explained to survey takers as follows: once you enroll for the service, you enter your risk profile and, using advanced algorithms, the platform offers alternative personalised investment portfolios for you to choose from (this is different than investing in a mutual funds or ETFs that are not personalised) and continues to rebalance your portfolio as required.