As robots threaten private banking consultants

According to the research company Aite Group, currently under management of robo-advisors are more than $50 billion in 2015, this industry showed an increase of 200%.

One should clearly understand the difference between online brokers, such as TD Ameritrade or ETRADE, and robots-consultants. If the first one helps you to invest in stocks, bonds, funds by providing the necessary infrastructure in communication with the robots you just need possible to clearly identify your financial goals and objectives. After that, robo-advisors already do will decide how much money and where you need to send — and they themselves will make these investments.

In my opinion, a victim of development of robots-advisers will soon become not only the investment companies that focus on small and medium size investments of the investors, but also the whole sector of Private Banking (PB) is the main player in the field of servicing high net worth clients. PB, apparently, will simply cease to exist in the form in which it now operates.

Looks like a robot? What does he do and for how much?

For those who have never faced financial robots, I will just say that we are not talking about bipedal Android made of metal and plastic. Robot-Advisor is a program which carries a certain algorithm and with which users can easily interact, solving their personal financial objectives. As a rule, we’re talking about investing in the stock market and the management of this process.

The most advanced robo-advisors now working in the US. Leaders are companies such as Wealthfront and Betterment. For example, Betterment company of new York, has under management to $4 billion and more than 150 thousand customers (and, hence, the average client has entrusted the company about $26 million). She promises them not only investing in accordance with their personal objectives and preferences, but also puts a well-defined quantitative goal: to achieve results, which will be 4.3% higher than the typical investor, who is independently engaged in my investments. To start using this robot can be almost any amount. Betterment is a member of SIPC (Securities investor protection corporation), this means that the money each investor is protected up to $500 thousand in the event of bankruptcy of the company. And all this costs from 0.15 to 0.35% per year of the value of your portfolio.

California Wealthfront does not take their customers a fee if they invest up to $10 thousand More than wealthy investors pay 0.25% per annum of the value of their investments. Now she manages the investment portfolio of $3 billion and has 60 thousand clients. To start working with a company with $5 thousand it is Interesting that 60% of customers under the age of 35 years. This is a typical picture for the robo-advisors, and it means that the robots have good preconditions for sustainable development in the future.

Than robo-advisor differs from private banking?

And Wealthfront and Betterment have begun their first steps at the same time in 2008. It is not a coincidence. It was then that the foundations were laid for such an approach and made the first attempts to implement them. Know about it, so this time I worked on my book “don’t lose”. And in the section about asset allocation “played” with already available programs distribution of investment on various assets, showing on the model cases, the changes in the structure of investments depending on the age of the investor, its attitude towards risk, the tasks that it solves, etc.

Such programs were on the website of Smart Money magazine and the Morning Star company. That’s the kind of recommendation, for example, I received in 2008 for wealthy retired 60 years, who wants to have a regular income at 5% per annum: stocks of large companies — 3%, stocks of small companies — 3%, foreign stocks — 6%, bonds — 69%, current Bank account — 19%.

To these robo-advisors were only one step: just needed to “substitute” under each structural sector of real stocks or bonds. After the rapid progress in the development of exchange-traded funds (ETFs) this task is greatly simplified. Most modern financial robot uses these funds when working with their clients. It is not only easy, but cheap. As you know, the big index ETFs cost investors on average only 0.1–0.2% per year.

Private Banking differs from the robots at work co their customers? Your coffee consultant asks his client almost the same questions that you can find on the websites of companies robo-advisors (because they read the same books and studied in the same universities, and consultants). After such a meeting — a few days or a week — client receives a detailed proposal from his Bank with charts, tables, calculations and list of assets, where the customer has to invest. About the same offer the customer the robot will see on your computer screen instantly after you enter answers to the questions.

However, the palette of investment from Private Banking can be more diverse: if robo-advisors is mostly exchange-traded funds, you can offer and shares, bonds and structured products, and mutual funds. But who will have better yield in the end (let’s not forget that for the sake of it — and not for the sake of high level of service and pleasing to the soul of diversity — exactly what they’re doing), to predict extremely difficult.

What can be stated with certainty is the fact that initially the financial robots are a big handicap: the price of their services is much lower than in Private Banking. Total differences can reach 1-2% per year and more, and is a very significant factor affecting the yield of your investments, especially over the long term.

When in Russia?

At present, a company in the financial robots are growing like mushrooms after rain. They already have not only in America but also in Europe, Canada and even in India. For example, the well established Anglo-Italian firm MoneyFarm, which has a range of 12 model portfolios with good yields. Indian SAFE Trade offers its clients investment portfolios based on stock. In this sector everything is changing very quickly and improving. The game is worth the candle: the global market investment management is now estimated at $69 trillion. McKinsey&Co, industry robo-advisors can reach $13.5 trillion. This assessment is based on the assumption that 25% of affluent households (with $100 thousand to $1 million for investments) and 10% of chinatow” (from $1 to $30 million) automated investment service will be the most attractive.

It is clear that in this situation, the Private Banking employees are worried they may soon start to lose their customers who will move on to robo-advisors, where it is easier to operate and there is high expenditure on expensive consultants. Without investment, which are the cornerstone for business, Private Banking just becomes unprofitable and loses its appeal. It is clear that it will not happen tomorrow, but in the next 3-5 years, the loss of banks operating with rich clients, can become quite noticeable.

Global Private Banking are facing hard times, and it definitely will reduce in size. Will survive only the most professional and profitable, which will keep pace with the times.

Unfortunately, while the Russians did not Shine in terms of service offering robo-advisors. Among the known companies are currently not taking the money of the Russians. So, Wealthfront and Betterment work exclusively with Americans, and residents of MoneyFarm prefers England or Italy. But I believe that it’s not forever. The same approach was typical at the time, and for the online brokers, but then they quickly opened the doors for foreign investors.

This niche is so attractive that, quite possibly, soon will appear in the market and domestic players. When choosing your robot, keep in mind that it is very important that the activities of this company were regulated by national Supervisory authority, had the appropriate license and reliable mechanisms for the protection of your investment. Beware also of those who registered, for example, not in England or the United States, and, say, in exotic jurisdictions such as Cayman or Bermuda. It is expected that in near future there will be and about robo-advisors, who want just to cash in on the fashionable theme of. Please, be careful!