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. 

Estimated US roto-advisors assets under management

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.

Forecast of robo-advisory services adoption rate

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.

Importance of different factors when selecting a robo-advisory service

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.


Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.