It all started with fully automated stock exchanges. The next step is digital managers (robo-advisors). The winners are the clients. The global financial industry is facing the challenge of having to completely rethink its business models and adapt them to the new digital and mobile reality. This development encompasses new, disruptive peer-to-peer technologies (from computer system to computer system) such as blockchain, which will revolutionize the worldwide financial market infrastructure.

Customers want to benefit from this new simplicity, transparency and flexibility.

Retail banking is already feeling the pressure acutely. But even in the wealth management business and the product lab, asset management, the changes will be fundamental. Technology-based applications enable financial services to be delivered direct to customers. The potential is enormous, and it also makes the middleman superfluous. Customers want to benefit from this new simplicity, transparency and flexibility. They want to have access to their assets around the clock, for information or management purposes, regardless of their location and the device they’re using. The interface between customers and banks is being redefined.

Back to the Future

It’s nothing new for wealth and asset management to be facing challenges. A whole 20 years ago the Swiss stock exchange launched the world’s first fully electronic stock exchange. Physical open outcry trading was made obsolete. Every step in the process, from stock exchange orders to settlement, was completely automated. The next evolutionary step in the democratization of investing was taken by the fund industry. When the first exchange-traded funds (ETFs) hit the market, the powerful active fund industry didn’t even dignify the new competition with a weary smile. Now the ETF industry manages more than 3 trillion US dollars, with double-digit annual percentage growth – rates active funds can only dream of.

Now, so-called robo-advisory platforms allow even greater automation. They (robo-advisors) manage their clients’ wealth with the help of algorithms, and offer an unprecedented customer experience. It should be pointed out that the term “robo” is somewhat misleading, because it’s still people who are behind the platforms. But first things first.

ETFs Blaze the Trail

Before a client can become a user of a robo-advisor in the first place, their ability to take risks is assessed using an online questionnaire. On the basis of the resulting investor profile, within seconds the algorithm works out a suitable asset allocation. In most cases the foundation of this asset allocation is around half a dozen standard portfolios that are adapted to different risk aptitudes (from conservative and balanced to aggressive). These portfolios are modelled with ETFs. The investor benefits from low fees and a great deal of freedom, since index funds, like shares, can be traded on any stock exchange trading day. These digital managers practice what seasoned investment pros have been preaching for years: managing assets according to stringent criteria, and keeping emotions out of the equation. Many bankers sneer at these digital managers, but what many financial experts don’t understand is that the new reality isn’t developing on a linear basis, but exponentially.

Thanks to these platforms, investors with a certain minimum amount can invest their assets like the pros. But the (r)evolution has only just begun. Technological advances will enable customers to be analysed better and more accurately, with the help of behavioural economics and gamification approaches. But that’s only one side of the coin. It gets really exciting when you package different scientific and tried-and-tested investment strategies. As soon as a strategy displays a clear set of rules, it can be used as the basis for an algorithm and be integrated into a digital asset management platform.

The cornerstone was laid several decades back by leading economists such as Markowitz, Fama and French. It’s only now, thanks to access to real-time market data and steady technological progress, that it’s possible to model scientific theories digitally and implement them physically with securities. The way was paved by cost-efficient ETFs.

Pure Democratization

With this development, what you might call Robo Advisory 2.0, implementing things like momentum, risk minimization, size effect and value strategies, is no problem. And that’s not all: as soon as you’ve set up the technology and defined the interfaces, the logical next step is to package client-specific investment strategies. To do so you no longer need the expensive shell of a fund. As we’ve already mentioned, any rules-based strategy can be digitized. This doesn’t necessarily have to happen via ETFs; you can also do it with individual securities, all over the world. This opens up completely new possibilities for customers, and in the future there will be no need for collective vehicles such as funds or ETFs. Between the provider and the client there is a co-engagement, which translates into pure democratization.

Undreamed-of Possibilities

Not yet foreseeable, but by all means realistic, is the fourth stage of development. Thanks to artificial intelligence, it won’t be just the interface between robo-advisors and customers that is redefined, but the interfaces to other customers. Say hello to social investing. People can take investment strategies and stock exchange transactions as inspiration for their own portfolios. Or they can replicate the portfolio of other successful investors one-for-one. One criticism often levelled in this connection is the lack of advice. Naturally there are many people who don’t want to do without personal advice. And indeed we’re already seeing the first signs of hybrid models. Digital or analogue, it doesn’t really matter – both routes are possible. Ultimately it’s the customer who decides how much they want to do digitally – at lower cost – and what parts of their assets they want to manage with the support of an advisor. The future belongs to hybrid models and completely digital platforms. The big winners among all this progress are the customers, who get more banking at lower cost. But the most important point is this: customers get much more flexibility when it comes to managing their assets.