While until recently, only insiders knew about the concept of “robo advisors”, the term is now going through a period of popularity (see figure 1) and it is no longer possible to imagine a list of FinTech trends without it. Some of the options that are available on the market have been for some years, such as vaamo and quirion, but there are also new players like Scalable Capital (which has a BaFin license), who have considerably improved the professionalism of their presence and service portfolio. Further, many banks have recognized this trend and are working to develop according services or have already launched them, for example comdirect.
Figure 1: Google searches for “robo advice” over time
What is a robo advisor?
In a strict sense, robo advisors vow to do the same as normal asset management: the customer trusts their money to the asset manager, who uses a defined risk profile to invest it. Just like at an asset management company, the customer has no influence over the specific, individual investment decision.
The novelty of robo advisors is in the fact that assets are invested according to the details in an algorithm, thereby preventing human error (panic sales or investment based on “good faith”, etc.) in asset investment. The investment occurs based on ETFs, which allows robo advisors an attractive price offer: the current level of pricing is between 0.3% and 1.0%.
In terms of infrastructure, there is no need for branch offices as this product can be offered online without losses to ease of use or scope. However, this makes it all the more important to provide the customer with an intuitive and optically appealing user interface. And that is just the point that FinTechs have over established banks. On the other hand, established banks should not have much difficulty developing the underlying investment algorithm. Even if there is no such thing as a perfect algorithm, banks should have enough expertise to be able to develop a good one.
As well as this, there are also offers on the market which give the customer a lot of room for structuring their investment or which allow them to copy presumably successful strategies of others (so-called social trading). The former demands a certain prior knowledge and also hides a risk that the benefit of preventing human mistakes no longer exists, while the latter asks the question of whether the traders followed are acting honestly. And in both, the customer is responsible themselves for the final investment decision.
For all of the benefits, at the end of the day, the success of a robo advisor still depends on performance—And according to a study by an online broker comparison portal, there is still considerable room here for improvement; even if the assessed period was only over a short time. In addition, it will be interesting to see how robo advisors behave when markets fall.
If the hygiene factor of performance is also fulfilled in this scenario, then this kind of offer will play a serious role on the market, especially for investment sums of EUR 10–100k. Regular, non-ETF-based asset management is not possible in this asset range due to the low portfolio size and the size is also not particularly attractive for providers (whether that be banks or asset managers). So there are some reasons to believe that robo advisors have the potential to fill this investment gap.
If you take into account that a robo advisor may target millennials (the generation born after 1980), who in only very few cases have 7-figure assets, then the question of attractiveness might need to be reconsidered. After all, this generation is used to completing things without having to be in a particular location. With an offer that is purely based on human advisory services, it will become increasingly difficult to gain new customers from this age group. So adding a robo advisor to the own product portfolio, allows the possibility of already gaining tomorrow’s customers today.
(This article also appeared at Einmaleins der Börse)