Industry News

But the rise of automated advice services also carries operational and implementation risks

By James Langton |

 

The emergence of robo-advisors is set to transform the wealth-management industry, argues a new report from Fitch Ratings Inc.

The credit-rating agency says that the development of automated advice "has the potential to drive significant long-term change" in the retail wealth-management business.

"The rise of robo-advisors is being driven by a confluence of technological advancement and consumer adoption of financial technology, rapid growth in passive investment strategies, and regulatory change," the Fitch report says. "Robo-advisors could better enable retail wealth managers to more efficiently service customers through tailored products that better meet the needs of differing client segments."

Robo-advisors will likely continue to see double-digit growth in their assets under management (AUM) in the years ahead, according to Fitch, which sees the traditional financial services sector increasingly embrace the technology.

"As long as investment performance and offered services meet client expectations, robo-advisors offer substantial scalability and cost efficiency, allow for better segmentation of existing client bases, and align with the increasing popularity of passive investing strategies among retail investors," the Fitch report says.

Moreover, the move to fiduciary standards in the U.S. could also help drive demand for robo-advisors, the report notes: "Recently initiated regulatory changes could underscore the advantages of robo-advisors for wealth managers. Robo-advisors would not be exposed to conflicts of interest, provided their trading and investment management algorithms were properly designed and defined."

Given the potential advantages, Fitch says that it expects large banks' wealth-management divisions to adopt the technology increasingly as well.

"Firms launching robo-advisors will likely cannibalize some of their existing advisory services provided to clients," the report says. "However, given the rapid growth and popularity of automated advisory products, firms could risk losing clients to other firms or hamper their ability to grow market share if they do not launch their own robo-advisors. As such, robo-advisors could be an increasingly relevant technology requirement for wealth managers to defend market positions."

The rise of automated advice carries operational and implementation risks, Fitch also notes: "Challenges include maintenance of portfolios within stated risk tolerances, communication with clients, ensuring suitability of investments, and maintaining strict cybersecurity. The performance of automated asset-allocation and investment strategies under market downturns and severe volatility also remain untested."

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