11 Oct 2020Mark Shields

Can automation and robo-advisors help democratize the wealth management industry?

Digital wealth management software can increase the financial services industry’s cost efficiency and enable them to reach a wider audience with custom services.

One of the most interesting and impressive ways in which financial technology (fintech) has been affecting the lives of regular people has been through the increasingly popular use of self-service robo-advisors.  These are often seen by wealth managements firms as a way to tap in the proportion of the High Net Wealth (HNW) sector of the population who do not have an advisor, estimated to be 36% of the High Net Wealth sector in the US (approximately two million people), according to a previous survey carried out by Harris  on behalf of Nationwide Advisory. When considering those in the so-called 'emerging' HNW sector, which includes the growing mass affluent and younger generations, this is likely to be many times larger.

The use of 'robo' online digital platforms, algorithms and artificial intelligence can directly help investors automatically select appropriate asset classes and vehicles to put their money into, or alternatively back up financial advisors in providing a better tailor-made service.

As standalone robo-advisor startups have progressively multiplied in number to respond to greater demand for their digital asset management services, many financial institutions are seeing the future importance of this new wealth management software to their industry.

Even established asset management firms have been gradually rolling out robo advisor options (e.g. Vanguard, Northern Trust) to provide direct services to affluent investors to use.  This is greatly broadening the availability of financial advice, especially to investment savvy investors.

This ongoing process seems destined to fundamentally change the way the financial industry works. It will also dramatically affect how people manage their investments and interact with their brokers.

The basics of robo advisory

In essence, robo advisors are a form of digital private wealth management software that provides an automated solution intended to assist a traditional financial advisor and/or provide a digital advice experience directly to an investor. Robo advisor software typically first uses a questionnaire to determine the objectives and risk tolerance of the investor.

The software then applies expertly created algorithms to a database of possible investment options in order to come up with suitable investment suggestions for a client. These increasingly sophisticated algorithms can include integrated cognitive computing methods like machine learning and artificial intelligence.

The basic business goals of creating and using robo advisors are to lower costs, reduce the performance of mundane tasks, improve consistency among advice-giving staff, and increase the scalability of providing personally tailored investment services to clients. They are also a useful tool for investment advisors to nurture and bring new clients on-board that may not yet be at a stage of requiring higher-tier investment advisory services or discretionary mandates.  

Overall, robo advisors should improve the customer experience, support advisors in making better decisions, allow a broader range of clients to get investment advice.

Reaching the mass affluent with automated robo-advice

Recent industry figures have shown that the growth of the mass-affluent segment as potentially the biggest opportunity for wealth management firms.  Whether growing a business with retail investors, as they become wealthier, or whether finding new segments for high-net-wealth (HNW) managers, automation and robo-technology can support growth plans for wealth managers.  

The recent Credit Suisse global wealth report highlights this opportunity.  It shows that the biggest wealth segment globally to be the mass affluent.  It estimates that 499 million people (9.8% of the global population) have a net wealth amounting to between $100,000 and $1,000,000 - a total of $140 trillion.  Broadly speaking, one can see the growth of new money in the east, as young entrepreneurs develop wealth, and the shift of inter-generational wealth in the west as the populations stabilize and age.    

The competition in this growing affluent market segment is increasing.  It also brings into question some of the traditional industry operating models.  Why are retail banks not able to step-up and serve the mass affluent segments? Why can't HNW managers or private banks scale their services to a wider audience? Is a universal wealth management model sustainable?  The operating models of tomorrow need to be able to adapt to their clients ever changing fortunes and lifestyles - and potentially cope with four or more generations of family wealth.  

Automation and robo advisors have already made significant inroads into assisting financial advisors by doing repetitive work traditionally performed by humans. This advancement is already notably changing the way the wealth management industry operates.  However, the real shift is still to come.  The opportunity to democratize wealth management and better serve the mass-affluent is on our doorstep.  

This change needs more than just automated processes and good algorithms. To help wealth managers take advantage of the democratization of wealth, we recommend a a five-step recipe. The need to adopt cloud services models and the participation in ecosystem API models to ensure rapid and scalable deployment on your own platform. To leverage technology to engage with clients on whichever social channel they may be using at any one time - in a consistent, secure way. To harness data science techniques to gain insights, such as distributed learning and network graphs, to better serve your clients and win over new clientele and to combine all these technologies in a reinvented customer journey.  And perhaps beyond these five steps is the digitization of assets themselves, as non-bankable assets, the erstwhile preserve of the rich, are made more accessible to the affluent investor.  

Is investment education the key to wealth democratization?

Ultimately, the new technology will change the way in which many people interact with their investment firms, as people comfortable with modern technology will choose to use digital advisors for at least part of their investment needs.

Nevertheless, in many cases today, existing software algorithms benefit from having an experienced person looking over the proposed results and give the final go ahead to a proposed investment.  When artificial intelligence is adopted, algorithms are able to learn and adapt and so could provide a higher level of investment advice to support and enhance that presently offered by professional financial advisors.  

The challenge then becomes one of whether end clients are really willing to adopt and trust automated advice and then if they are able to determine when the right time to use a professional advisor is - in an efficient manner.  How competent are investors at understanding what the robo-proposal is really recommending them to do and the risks these investments entail?

One of the interesting developments in the wealth industry currently is the provision of investment education online direct to the investor.  Built within the investment app, the investor is able to subscribe to snippets of investment courses to bring them up to speed on different investments vehicles, from basic equities through to complex derivatives and structure products.  Gamification with  rewards and certificates can encourage them along the journey.  Investment features and options are unlocked as they become more sophisticated and practiced in their investments strategies.  The opportunity to then interact with professionals, who can take over during vacation and busy periods, or indeed to leave the robot in charge, can be also offered.    

Clearly automated investment tools will not appeal to all. But for the tech savvy and the younger millennial generations, such approaches could provide quick-wins on the road to building a presence in the mass affluent segment.  


The cost efficiencies and increased scalability of digital wealth management tools and robo advisors — especially for younger investors more willing to interact with them — have already provoked widespread change in the personal financial industry.  

But the major change is still to come.  The combination of the market opportunity to better serve the mass affluent and the technological changes, such are the rise of artificial intelligence will undoubtedly have a dramatic impact on supporting existing financial advisors working in this field as well.  It will ultimately lead to the democratization of wealth management itself.  

Find out more in our Avaloq report about the drivers of the democratization of wealth management and the unique business opportunity it constitutes for wealth managers.

Written by Mark Shields
Mark has over 20 year's of experience working with financial technology across the banking, asset management and capital market sectors. He regular writes content for Avaloq's global community of banks and wealth managers, covering technology trends and innovations, to provide insight and provoke new ideas.
Democratization of wealth management

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Learn more about:

  • The four megatrends and what they mean for the financial industry
  • How innovation, industrialization and individualization are key to mitigating structural margin pressure
  • How the shift of wealth to a new generation will shape client needs
  • Why the affluent segment poses a significant business opportunity for wealth managers