Financial tech, often abbreviated as Fintech, is a rising economic industry that has seen companies making the move to a reliance on new age technologies that make financial systems more reliable and efficient.
One of the latest manifestations of the Fintech craze is the advent of “robo-advisors” – automated financial platforms that seek to replace the traditional advisors. These systems use advanced algorithms to provide users with financial advice and investment portfolios, a service that some believe is threatening the existence of human wealth managers.
Proponents of these new Fintech advisors can point to a multitude of reasons why this shift has occurred. According to Fintech Business, robo-advising software is typically far more accessible to customers with lesser assets. Traditional advisors typically set higher minimums.
In addition to the accessibility, automated financial advisement services are more affordable than their human alternatives. Customers will likely be offered a free trial period, and will look to pay 0.25 percent to one percent of AUM (assets under management), Fintech Business reports. By contrast, classic advisors charge one to three percent of AUM.
Perhaps the most notable advantage of robo-advisors is its appeal to a younger generation of investors. To the current “millennial generation,” who grew in the digital era of ATMs and smartphones, the appeal of this new analytical software is undeniable. A person-to-person interaction may be sacrificed in lieu of the convenience of 24/7 web and mobile app access.
Millennials are also characterized as being more distrustful of financial institutions when compared to older generations. Given the recent economic crisis among other contributing factors, younger people simply don’t trust in traditional wealth managers. They value the transparency of the automated services.
It isn’t just limited to the younger generation. According to the New York Times, robo-advising company Betterment “realized that 20 percent of its assets were from customers over the age of 50.” Apparently the service appealed to seniors who sought advice on how to withdraw their retirement money. In response, Betterment developed a service that catered to them specifically.
Despite the success of these robo-advisors, not everyone believes this spells doom for the classic wealth manager. According to a column by Chance Barnett of Forbes, younger people still value the personal interaction of a traditional financial advisor.
“Eighty-one percent [of millennials] wanted their advisor to either manage their money completely independently, or collaboratively with them compared to 86% or Gen-X’ers and 89% for Baby Boomers — not that different,” writes Barnett, citing a report from Salesforce.
Barnett goes to say that according to the data, a slighter greater percentage of millennials favored face-to-face interactions during financial advisement when compared to older generations. The biggest contributing factor in choosing an automated service seemed to be the lower cost overall.
It is undeniable that the industry is shifting to a certain degree. Robo-advisory firms such as Betterment and Wealthfront have raised hundreds of millions of dollars in venture funding in recent years. Older companies like Vanguard have responded, slashing fees and launching their own robo-advising services to tremendous success.
The question isn’t whether or not people will turn to robo-advising, but if the industry will adapt to this change, bring old school methods to the new millennium in a way that appeals to all.