The purchase of the Robo-adviser FutureAdvisor by BlackRock in 2015 (the world's largest asset manager) shows the increasing interest from ETF providers for automated online investment services for financial advice.
A study published by BI Intelligence revealed that Robo-advice will grow rapidly in the coming years and will control $8tn in assets by 2020. More and more ETF providers are trying to acquire or to build their own Robo-advisers such as Deutsche Asset Management (owner of ETF Business DB X-trackers) who is working on its own automated-advice solution.
Robo-advisors can be defined as online wealth management services that provide automated, algorithm-based portfolio management advice without the use of human financial planners. Robo-advisors generally use low cost Exchange Traded Funds (ETFs) or index funds to construct portfolios.
This new craze for Robo-advisers can be explained by the fact that new investors, who grew up with the internet, are more comfortable using online services and seem to prefer cheaper online services rather than traditional wealth managers. In a survey conducted in 2015, Legg Massion Global Asset Management revealed that 85% of UK based millennials are comfortable with robo-advice, compared with only 37% of investors over 40. In light of this evolution, some warned that this new way to provide advice to investors might result in consumers opting for inappropriate products. It seems however that Robo-advisers are aware of that and most of them have upgraded their offering. In addition to online services, they are proposing different packages (at different prices) which include advice from human advisers. Robo-advisers seem to have gone hybrid…even with robots, we still need humans.
As mentioned above, Robo-advisers were originally best suited for ETFs and index funds. ETF providers see Robo-advice as a positive evolution for them because it allows them to expand their distribution channels and will attract interest for ETF products. “ We are convinced that robo-advisers will have a major share of the wealth market in the future, and since they are mostly using ETFs, that’s beneficial for ETF providers” said the head of digital at Deutsche Asset Management.
It seems that Robo-advisers will not only be beneficial for ETF providers. Some of them are indeed looking beyond ETFs to active funds such as RiskSave Technologies who will use individual stocks rather than funds.
Read the Financial Times article here