The Rise of Robo-Advisors, and Why You Should Care

Artificial intelligence is helping transform the fast-evolving financial sector. Through use of advanced data analytics and algorithms, investment analysis and portfolio construction is becoming increasingly efficient for the creation of optimal portfolios, allowing investment managers to scale their business and lower costs. With access to digital information, data mining, and additional technology, attribution and superior analysis that once took days and weeks to perform now takes minutes.

Financial Technology—FinTech—is the new client deliverable, creating the rise of Robo-Advisors. A traditional investor portfolio consisting of individual stocks and/or bonds is no longer the standard. The financial sector is being reinvented; advancements in technology are at the epicenter of change. FinTech is shaping the way people bank and invest, providing them access to financial inclusion at lower costs.

As the global economy evolves, mutual funds and exchange-traded funds (ETFs) have risen in popularity, allowing access to specific and focused asset classes and markets in a diversified manner. This trend enables investment managers to deliver optimal and globally diversified portfolios to investors of all wealth levels.

Robo-Advisors deliver low-cost portfolio construction via passive ETFs and significantly reduced advisory fees with minimal human intervention. They allow investment managers to provide the masses more personalized services
and solutions, and an exceptional client experience that would otherwise be reserved only for high-net-worth individuals.

The demand for Robo-Advisors shows us the desire for easy and instant access, low-cost solutions, transparency around fees and increased efficiency. Given many robo-solutions are packaged free of charge or with advisory fees as low as 0.25 percent, adviser differentiation and adoption of technology integration is key. While investments perpetually evolve, the industry is placing emphasis on fee compression, creating a difficult environment for advisers.

Amidst the struggle to demonstrate a value proposition and provide increased services, they are also now faced with shrinking margins. The Race to the Bottom. Fees across the board are being reduced, so exploring ways to deliver low-cost features to investors is integral. Firms like Fidelity, which launched zero-expense index funds last year and SoFi, and its announcement of the first zero-cost ETFs, are capitalizing on these race-to-the-bottom trends.

While much attention is given to these passive solutions, active management can still add value in portfolios, offering higher active share and better risk profiles that focus on downside protection. Leveraging the cost-effective ETF wrapper, and favorable ETF tax benefits, prominent asset managers have finally found a way to compete with passive strategies by launching actively managed ETFs.

The Midwest Mecca Effect. Another cost-saving trend has firms open-ing headquarters in the Midwest for a fraction of the cost of coastal cities. The Midwest is a mecca of potential in the FinTech world. Chicago is a global financial center, Kansas City has been dubbed the Silicon Valley of the Midwest, and the Midwest has more financial institutions and philanthropic cities per capita than any other regions of the U.S. American Century is headquartered in Kansas City, along with thriving boutique firms like Palmer Square and Tortoise Capital.

FinTech allows large, well-known active asset managers, like American Century, to effectively launch active ETFs at lower price points than their active mutual fund counterparts. Giving Investors What They Want. FinTech is paving the way for active managers to enter the race to the bottom.

It has also created an avenue for money managers to effectively incorporate and build portfolios that deliver investors what they crave—investments that are morally aligned with their core beliefs and have a positive impact on society. Many clients want their capital to do some good in the world without sacrific-ing return, and sustainable investing in collaboration with FinTech has found its way into several Midwestern firms. Now is the time for our industry to embrace technology.

We need to emulate the big tech companies that created a road map for providing high-level services in a tech-forward world. It is only a matter of time before those tech giants infiltrate the financial-services sector. While adviser and client relationships are important, we must leverage FinTech to deliver superiority by creating
those Amazon-, Netflix- and Google-like experiences. We must capitalize on technological advancements—any delay may put your firm out of play.