Can Robots Fight Inequality?

Inside the Ongoing Transformation of the Wealth Management Business

Joshua Sortino I Unsplash.com

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.

Source: BCG
Source:IPE.com

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.

Overview

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.

Robo Advisors

Vanguard continues to lead the Robo Advisor market by AUM. However, platforms such as Betterment have witnessed phenomenal growth.

Source: ETF.com

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.

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.

Source: cbinsights.com

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

Financial Literacy

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).

Regulatory Concerns

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.

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.

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.

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.

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Futurist@The Intersection of Finance, Tech & Humanity. Stories of a Global Language: “Money”. Contributor @ Startup Grind, HackerNoon, HBR. Twitter@akothari_mba

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Abhishek Kothari

Futurist@The Intersection of Finance, Tech & Humanity. Stories of a Global Language: “Money”. Contributor @ Startup Grind, HackerNoon, HBR. Twitter@akothari_mba