Artificial intelligence is disrupting the financial industry at large. Investment advisory and wealth management are experiencing this disruption the most. Enter robo-advisors.
The digital financial advisory industry is set for strong growth in the UAE in the coming years, and while business-to-consumer (B2C) solutions are rapidly gaining traction from the public, business-to-business (B2B) robo-advisor providers are emerging as key enablers for banks and financial institutions, allowing them to quickly deploy powerful platforms.
With the Covid-19 pandemic, digital transformation is certainly the future of the financial services industry with an already marked increase in remote engagements, automated services, digital products, and client behaviour. Incorporating such technologies within the traditional wealth management model will not only enhance human performances but also attract new clients.
In recent years, we saw the rise of robo-advisors in the global market, a class of financial advisors with moderate to minimal human intervention. By using algorithms to analyse a client's profile and delivering solutions tailored to one's goals and risk profile, robo-advisors are making investing simple and affordable. They have also opened investment advisory options to a wider audience at lower costs.
Interest in digital investments
Robo-advisors can complement—not threaten—any bank’s business model and improve customer engagement. According to KPMG’s report, Robo Advising: Catching Up and Getting Ahead, all types of bank customers—including millennials—are interested in a digital investment experience. Regardless of age, income or gender, 75 per cent of bank customers surveyed by KPMG said they would be likely or somewhat likely to consider a robo-advice service from their bank.
With large numbers of HNWIs and a relatively young and tech-savvy population, GCC countries are ideally placed to foster the development of such robo-advisory services. The region is already establishing fintech sandboxes that were announced by Kuwait and Qatar in late 2018, and by the Saudi Arabian Monetary Authority (SAMA) in February 2019. While in July 2019, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi General Market (ADGM) issued a regulatory framework for robo-advisors.
Much of the existing banking and wealth management efforts in the Middle East are focused on the ultra-high-net-worth (UHNW) and high-net-worth individuals (HNWIs), giving digital financial advisory platforms a massive opportunity to fill the gap. A lot of investors don’t qualify for these wealth management services, and it hasn’t been cost-effective for banks to provide those services to the mass affluent market.
With the rise of wealth-techs posing threat, banks are now catching up to adopt new approaches to advisory to stay ahead of the game focusing on the flexibility of low-cost services and no minimum balance requirements, which can be coupled with access to discretionary portfolio management services and make the platform attractive to a wide range of investors within the region. Thus, opening up a wider market for its wealth management business such as bank’s retail customers without burdening the relationship managers.
So how do banks start embracing the robo technology?
Even with the shifting demographics, a set of tech-savvy, wealthy millennials on the rise with time and cost efficiency at the core of all of their decision-making, investing in stocks and bonds can still be a daunting proposition.
Hence, banks should first determine the type of customer relationship they want to foster and define the relationship customers will have with the bank’s human financial advisor. Some institutions choose robo-advisors as a stand-alone financial advisory experience for customers while others prefer hybrid approach with access to human advice when needed.
Moreover, while defining the strategy and customer relationship, the bank also has to verify client’s risk profile and investing knowledge – a quick way to ascertain this would be using an investor questionnaire.
Other aspect a bank should decide is about the business and legal structure of its robo-advisor against the desired type of customer relationship. Once a bank decides to embark on the robo journey, it is then crucial to choose the right partner that could yield a robo-advisor that serves customers and cultivates relationships for years to come. The implementation process is demanding and should be done with experienced vendor with a proven track record instead of newly established fintech that may not deliver what the bank expected.
The writer is the Sales Director at Comarch