Understanding Robo Advisory from the Service Provider’s POV

The idea of keeping investing decisions free of emotions has been around for a long time, but applying the same was not exactly possible because of human involvement. No matter how hard one tries, detaching biases from human judgment is almost unrealistic. On the other hand, a holistic understanding of the human condition is also vital for providing effective wealth management that can define advisory in its ideal state. 

Robo advisors (RAs) are gradually bringing the benefits of AI and ML together. Robo advisors take on wall street by automating investment decision-making without emotional guidance, and that too at just 52% of human advisory costs. Although RAs came into being with more straightforward objectives, such as retirement planning to generate safe and optimal returns, their scope will broaden dramatically with technological advancements.

Source Credit: Deloitte

Let us look at the different robo-advisory models today and the value propositions they offer.

The various RA models

• White-label robo-advisory involves offering a provider’s technology and platform to other companies under their branding.
• Platform robo-advisory refers to a standalone platform developed and operated by a company for its clients.
• SaaS robo-advisory is a shared service where a third-party provider hosts and maintains the platform.

Robo Advisory as a white-labelled solution

As a product offering for the contracting partner, RA automates non-technical tasks such as customer onboarding, account opening, and account management. The bank retains ownership of all financial information on its clients’ accounts. At the same time, the service provider manages day-to-day operations such as creating new accounts, updating contact information, and being their asset custodian. This means a provider can offer their application to any company, large or small, and customize it to their needs. Automated reports are provided for each client, so they don’t have to worry about anything else but focus on what matters, i.e., maintaining client relations. SigFig, WealthKernel, and AdvisorEngine are examples of companies that provide white-label robo-advisory solutions.

Services offered by White Label RAs:

• Providing insight into customers’ financial profiles and performing routine monitoring of accounts (such as analyzing balance trends)
• Identifying potential fraud risks through automated detection mechanisms
• Rebalancing portfolio automatically and customizability based on trade allocation rules, improving portfolio returns by .91%
• Maintaining customer data systems within their IT environment so that they can respond quickly without having to rely upon third parties like banks’ call centers
• Offering payment gateway support based on customer preferences

Attractiveness of white-labelling

White labelling is a great way to enter the market with brand differentiation and grow your business. There are some advantages to it:

• The white-label solution is considered the most uncomplicated variant since it does not require any changes in code or interfaces between the bank and the service provider.
  • However, this type of collaboration requires high trust between both parties. Therefore, banks are only willing to use this method if they have enough resources for risk management and compliance issues related to this kind of cooperation.
• Banks can leverage a white-labelled solution without having the time or money to create an original product.
  • Still, certain changes must be made per the bank’s requirements before launching your project.

Robo Advisory as a Proprietary Platform

In this model, robo-advisors offer their services directly to individual investors without involving any intermediaries. Investors can access the platform through mobile apps or websites. Examples of D2C robo-advisory firms include Betterment, Wealthfront, and Personal Capital. They can support multiple RAs, so you have one software solution for every kind of advisor or practice type (e.g., target-specific RAs). The RA platform is essential to the private banking value chain because it lures tech-savvy clients with personalized offerings. And even HNIs value seamless individual journeys in an omnichannel setting to stay loyal to their banks. With client behaviour and expectations changing, global RA users are expected to cross half a billion by 2025.

The attractiveness of a proprietary platform

A standalone digital platform is more flexible, scalable, and secure than an RA application.

It allows you to scale your business quickly as your client base grows.

The customer interaction benefits such as Wealthfront customer service are a USP of such platforms.

Platforms can also be more reliable because they are built on the foundation of AI technology, which makes them highly efficient in processing transactions and generating reports. In addition, platforms such as SoFi are usually more suitable to assist financial advisors in understanding their client needs better, given the combination of technological sophistication and advisor contact.

These platforms typically offer low-cost investment solutions and provide a user-friendly interface for investors to manage their portfolios. With the growing adoption of the platform solution, transaction costs will further decrease due to network effects.

Robo Advisory as a SaaS

In the SaaS model, a third-party provider offers the robo-advisory software as a service. The provider hosts and maintains the technology infrastructure, and clients access the platform through a subscription-based arrangement. Clients typically have limited customization options, and the platform is shared among multiple users.

There are also institutional robo-advisory services that are betterment alternatives and cater to institutional clients such as pension funds, endowments, and other large-scale investors. These platforms offer tailored investment solutions and risk management strategies based on algorithms and data analysis. BlackRock’s Aladdin, for instance, provides institutional investors with robo-advisory services for portfolio management and risk analytics.

Attractiveness of SaaS

SaaS robo-advisory solutions offer cost efficiency, scalability, and integration capabilities similar to a white-labelled solution but with little to no customizability. Here is a list of advantages it provides:

• It includes the necessary algorithms, data analysis tools, portfolio management functionalities, and user interface components.
• It’s a plug-and-play solution that often aligns with the client’s branding and provides a consistent user experience for their customers.
• The SaaS provider handles server maintenance, upgrades, and security, allowing clients to focus on their core business.
• It allows for seamless data exchange and integration with other financial tools and systems used by the client, such as customer relationship management (CRM) software or trading platforms.
• SaaS robo-advisory providers often ensure their platforms comply with relevant financial regulations and data security standards.

Robo advisory is more than a software solution

From a service provider’s perspective, RA is more than just a software solution. It is considered a prototype representing a decision support system from a technological viewpoint and a personal assistant from a product offering perspective.

Many hybrid RAs leverage technology for portfolio allocation and rebalancing while providing access to human financial advisors for personalized advice and support. One example is Vanguard’s Personal Advisor Services, its Robo review can be found here.

These are just a few examples of different robo-advisory business models. The financial industry has always been open to technological adoption, and the adoption of fully automated AI-driven software is an excellent example of this trend. RAs have come a long way from mere stock recommendation tools used by FIs internally to fully integrated investment platforms for retail investors.

The robo-advisory landscape continues to evolve, and various firms may adopt unique approaches based on their target market, value proposition, and technological capabilities.