Industry News

Rather than cannibalizing traditional financial services firms’ clients, robo-advisors could open the market to cost-sensitive investors

By James Langton |

 

The fledgling "robo-advice" business has the potential to broaden the market for financial advice rather than unseating traditional financial advisory firms, suggests a new report from Deutsche Bank AG's research department.

The report, published on Thursday, suggests that although millennials were the initial target market for these services, robo-advisors have had success in attracting older, wealthier clients as well more recently.

"Cost advantages have been creating significant momentum for robo-advice," the report says.

In terms of investment performance, the report notes that "the success of passive investment strategies in recent years, together with resilient robo-advisor performance during market volatility, might provide further impetus for their services. Still, robo-advisors' performance needs to be tested over a longer period."

Deutsche Bank also suggests that robo-advisors will likely help broaden the market for financial advice to more cost-sensitive investors rather than cannibalizing existing clients.

"As an affordable alternative, robo-advice also has a lot of potential to contribute to financial inclusion," the report says. "It is not a substitute for financial education in a society, but it can work as a complement to financial planning. This is especially important for households with low financial capabilities."

Financial decision-making is very challenging for many households, and the availability of low-cost, automated advice can help address this, the report notes: "Of course, the availability of robo-advice does not change the need for financial literacy. Nevertheless, if households were to delegate some of their investment decisions to robo-advisors, it could be an alternative way to enhance the quality of their financial decisions in light of markets characterized by growing complexity."

Ultimately, the report concludes that "robo-advice has great potential to complement rather than displace traditional financial advisors in the future."

At the same time, Deutsche Bank also suggests that the traditional financial services industry will become a bigger player in the robo-advice business, with the automated advice business becoming tougher for new entrants.

"As a result," the report says, "there will probably be partnerships and takeovers by established asset management firms or banks in the coming years."

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