Can Robots Fight Inequality?
Inside the Ongoing Transformation of the Wealth Management Business
This article introduces readers to the world of robo-advising and ends with a hope that robo-advising can, one day, provide access to wealth management to those who cannot afford it presently. In the process, making it a truly great human story.
The gratification of wealth is not found in mere possession or in lavish expenditure, but in its wise application. — Miguel de Cervantes
The Wealth Management Business
As per BCG, global private financial wealth (Private financial wealth includes cash and deposits, mutual funds, listed and unlisted equities, debt securities, life insurance payments, and pension entitlements, all either held directly or indirectly through managed investments, and held either onshore or offshore. It excludes investors’ residences and luxury goods) grew to $168 trillion in 2015.
To put that in context:
In 2014, according to the CIA’s World Factbook, the GWP (Gross World Product) or Global GDP totalled approximately US$107.5 trillion in terms of purchasing power parity (PPP)
Most of the new wealth, unsurprisingly, will be created in developing markets:
As per IPE(Investments & Pensions Europe), the top 25 asset managers in the world today are:
How Do Wealth Managers Make Money
Although there can be many ways to charge clients, wealth managers typically charge anywhere from 0.5% — 2% per year of the Assets Under Management (AUM). The more assets you have, the lower the fee.
Recently, Gary Kasparov was discussing how Artificial Intelligence (AI) was transforming life and the fact that many feel afraid because they might lose their jobs. The important point that Gary made was that AI is a natural evolution in the unending journey to make human life better. In other words, it is inevitable. It is up to us to re-skill ourselves in an AI world.
In a very similar vein, the employment of algorithms (robots) in the wealth management industry is a very natural evolution. Some of us will get adjusted rapidly and some of us will take time. Before I provide an overview of the Robo-advising industry, I would like to just clarify a small doubt. Robo-advisors are not robots but rather software bots (pieces of software code or algorithms) that are programmed to manage wealth.
Vanguard continues to lead the Robo Advisor market by AUM. However, platforms such as Betterment have witnessed phenomenal growth.
As per Jon Stein, founder of Betterment “Since we launched in May 2010, our assets under management have grown to $8.5 billion at a 300% rate and we have 250,000 customers” (Source: Forbes, April 26, 2017)
Business Insider (BI) Intelligence reports that robo advisors will manage approximately 10% of all global assets under management (AUM) by 2020. This would equate to approximately $8 trillion as displayed below:
White Label Robo Advisory Platforms
White Label Robo Advisory Platforms allow traditional wealth managers/financial advisors to compete with Robo Advisors by adopting white label robo advisory platforms to enhance and supplement their current offerings.
Leading White Label Robo Advisory platforms include Jemstep, TradingFront, NestEgg, Envestnet, Betterment Institutional, Motif Advisor etc.
Corporate Venture Capital
Traditional banks have deployed their venture funding into wealth managers such as Betterment and Motif. The table below illustrates various investments in wealth management and personal finance. While Citi has invested in Betterment, Goldman has taken a different approach by investing in Motif.
An Example: Betterment
Betterment was founded by Jon Stein in 2010. It aims to provide access to all types of investors to robo-advisors. It has witnessed a blistering pace of growth since it was founded in 2010. Also, a massive wave of asset allocation to ETF or Index funds (also known in financial parlance as “passive investing”) has helped Betterment’s growth.
Betterment believes its approach to “long-term investing can help earn 2.66% more per year than a typical investor. It believes its technology helps make this possible by lowering taxes, lowering fees, diversifying your portfolio, and enabling better investor behavior” (source: betterment.com)
Depending on the option an investor chooses, Betterment charges anywhere between 0.25% to 0.5% of the AUM as fees.
In 2005, the Organization for Economic Cooperation and Development (OECD) published an important report highlighting the severe lack of financial literacy in many countries around the world (OECD, 2005).
The value of robo advising, in my humble opinion, is directly correlated with the growth of financial literacy. In fact, digital platforms can actively promote financial education.
In the US, Robo advisors are being subjected to the Department of Labor’s (DOL) new fiduciary proposal. In a nutshell, the fiduciary proposal is meant to force financial advisors to always act in the best interest of the client.
Regulation, therefore, has to be adhered to and could pose challenges to robo advising platforms. Although, many believe, the platforms can meet requirements.
The Tipping Point
The difference, in my humble opinion, between the success of robot advisors vs traditional financial advisors could ultimately lie in the way humans learn and in the differences in financial literacy.
For someone who is financially savvy, there is a greater likelihood that they would opt for robo-advisors.
Consider, for example that the older generations who were not digital natives (born with modern digital technologies such as the Internet or iPads), have completed their education and prefer to obtain most of their learnings from personal interaction as opposed to millennials or people with a millennial mindset who prefer to learn using YouTube, their peers on social media and MOOC’s.
Older people may prefer in person meeting, younger may not. Or perhaps it’s attitudinal and crosses age boundaries. At the end both robo advising and traditional wealth managers make money for their clients (that’s the assumption here). For some, it could be a trade off between earning say 300 bps more vs. the ability to ask questions to a human. In other words, a trade off between perceived comfort and returns. Consider a simple framework to map clients:
Perhaps, today, the wealth management business need a hybrid of man and machine to thrive. It will be comforting to many clients to know that in addition to robo-advisors, there is always a human to reach out to in case of any concerns.
Consider this: many banks today are loathe to do away with branches only because a certain section of population wants to know that a branch is available in case they need one. Even if such people don’t step into a branch atleast once in a year. However, the dilemma is that section of the population could be the one with more wealth than their younger counterparts. In that sense, there is a separation between the wallet and the will to use digital platforms.
The Fight Against Inequality
Technology, today, is not only reshaping finance but also overall human life. it is pervasive. I cannot stress enough the importance of being technologically literate. Tech literacy is the modern equivalent of primary school education.
The incredibly human side of technology lies in its ability to enable access to virtually all of humanity and to promote financial inclusion.
In a recent interview with James Altucher, Matt Barrie, CEO of Freelancer.com spoke about a very touching story. Freelancer.com is a platform that connects freelancers with people needing them. It takes a 10% commission from the freelancer and a 3% commission from the entity providing the freelance job. Matt spoke about a freelancer in Bangladesh who couldn’t sustain a living before. But, with the help of Freelancer.com, he was able to sustain a livelihood and buy a house. In fact, the Bangladeshi freelancer joked that he could now get married because he could afford the dowry.
Ultimately, the true benefit of technology lies in inclusion and access. In my opinion, robo advising, if employed for the benefit of the masses, can truly promote inclusion, provide access to wealth management to the masses and can be one of the weapons in the fight against inequality. As per Aqumon:
As a result of the ease of global asset allocation and low threshold, wealth management has undoubtedly become more equitable.
Of course, wealth management business is not a charity. Therefore, the economics have to work out but that could mean creating a sustainable model based on AUM.
Also, it is foolhardy to think of algorithmic wealth management as the only weapon against inequality but it certainly can be a powerful one. However, to script a great human story, the ‘aam aadmi’ (Hindi for the ‘common man’) must be front and center in all endeavors.