Robo-Advisory: Looking Ahead

Hot and Cool

Robo-advisors are about the hottest thing in the exciting and growing FinTech scene that has emerged around established financial institutions, such as banks, asset managers or insurance companies in recent years. They are set to challenge incumbent players by building new financial services, or migrating traditional ones into the digital age. As such, robo-advisors have kick-started a process of “creative destruction”, driving and fostering innovation in the financial sector.

The benefits that robo-advisors bring to investors have many different angles. To name a few:

  • ease of access to discretionary management services
  • inclusion of more retail investors and capital in financial markets
  • portfolio diversification with modern investment tools
  • and an attractive price tag for the services

Most of those characteristics have been discussed and analyzed in similar reports and forums. This is why this publication takes a different approach, with the main focus on transparency of portfolios, models and investment tools.

Most robo-advisors – especially in Germany – have a relatively short history of typically about two years. This has been a period characterized by historically low yields, rising equity markets, and tightening spreads, all on he back of an easing regime by the largest central banks around the globe. And consequently, positive returns for pretty much all multi-asset mandates and portfolios. The real test for robo-advisors and their investors will come when the heat increases and markets enter more shaky territories. Particularly those robo-advisors with frequent and proactive reallocation models will keep benefiting investors under this scenario, while clearly this wouldn’t prevent potential losses, or limit potential drops in performance to any guaranteed maximum. Our extended simulations demonstrate the possibility of such outcome, for example around the start of the 2008 financial crisis. No surprise.

This is certainly an area where robo-advisors can – and should – add more transparency and educational effort for their clients. Patience in terms of an extended investment horizon and the acknowledgement that a “digital” manager can’t solve it all, will be the main ingredients for turbulent periods – stay cool!

It’s not all about fees

Less than 0.06% a year. This is the price of the “Cheapest ETF Portfolio” as compiled and published by ETF.com for the U.S. market. Costs are clearly an important aspect when selecting ETFs for a portfolio. The pressure on fees seen in the U.S. is also hitting the European ETF and mutual fund market, and consequently is also putting pressure on roboadvisors. This trend will keep benefiting investors via robo-portfolios. However, pricing should not become the sole argument – neither for robo-advisors in their positioning, nor for informed investors when making their investment choice. Pricing clearly has a lower relevance compared to the quality of the allocation model, or the overall ETF selection. No surprise there, that an index provider makes the case for additional indices to be used in robo-portfolios. Broader diversification, efficient rebalancing methods, smart beta, factor investing, thematic exposure are just a few examples to name here.

And, of course, Environmental, Social, and Governance (ESG)

No doubt that ESG and impact investing are also driving and reshaping the offerings of robo-advisors. Some first players in the U.S., as well as in Europe, have already introduced portfolios with ESG characteristics. The integration of social and environmental criteria costitutes a step towards tailored investment in robo-portfolios, as it enables customers to integrate such values into their investment strategies. ESG investing and its different sub-segments are just one very good example of thematic investments mentioned above. Again, this is nothing specific to just robo-advisors, but is an industrywide trend observed throughout the investment community. We certainly expect to see more ESG in the future.

All Robo? All digital?

Despite posing a challenge to traditional players, robo-advisors can’t and won’t be the only approach to investing. However, they for sure are a good, complementary service to traditional offerings. Think about it this way: even about 20 years after the first parcel being shipped by Amazon, there are still book shops on the streets – I guess better ones by now. To the same extent, there will still be personal banking and investment services in 20 years’ time. Banks can implement hybrid models, especially around individual investment goals, such as retirement planning, or dynamics around life events. This is an aspect for which pure online profiling faces limitations as of today.

I do hope this report triggers thoughts and discussions with stakeholders and interested parties operating in this growing segment – from retail investors, via competing banks and asset managers,
to robo-advisors themselves. I am personally looking forward to engage.


Timo Pfeiffer
Head of Research & Business Development