Automated Investment start-ups are attracting MBA entrepreneurial talent as well as small investors across the globe based on a number of factors including lower costs and ease of business. Increasingly, those with big money, are also coming in forcing brokerages and banks to change their strategies. We take a look at various aspects of the business.
How would you like a ‘robo-advisor’ to sift through mountains of data to arrive at the most suitable portfolios to invest your hard earned money at a fraction of the fees you may have to shell out to a human financial adviser?
No wonder, such business start-ups are catching on. Recently, Betterment, a start-up by Jon Stein, an alumni of Colombia Business School, had raised $100 million of equity, raising its value to $700 million. Stein had launched the firm way back in 2008, when he was just a year into the MBA course. At present, the firm is stated to have around $4 billion in assets under management.
Zopa is among the pioneers in the business. It was launched in 2005 by INSEAD alumnus James Alexander, David Nicholson, Richard Duwall and Giles Andrews as the first ‘peer-to-peer (person to person) lending marketplace worldwide.
Yet others are TransferWise, started by Taavet Hinrikus, another INSEAD alumni, SoFi and Nutmeg by Stanford grads and WorldRemit by those from London Business School.
Robo-advising has investors fill out online forms and algorithm-based software would create a portfolio that automatically rebalances it with the aim of maximising profit.
Estimates by Deloitte, claim that algorithms could secure assets under management of $7 trillion by 2025, up from around $100 billion today.
Meanwhile, banks and other lending institutions are feeling the heat and rushing in to unveil their own versions of the automated investing technology. At present, about 15% of investors in automated portfolios have at least $ 1 million at Charles Schwab Corp.
Where does that put traditional brokerages? They may have to adapt themselves to changing times by developing tools based on artificial intelligence for their employees as well as self-service channels for customers.
Consulting firm AT Kearney estimates that the new services will see a rise, managing as much as $2.2 trillion by 2020. the Robo-advisors charge less than half the fees of traditional brokerages, which cost at least one percent of assets under management.
Yet another factor is that it is attracting big money. According to an estimate, more than half of Betterment’s $3.3 billion of assets under management belong to those with more than $100,000 at the firm.
The advantage for the small investor going in for a robo advisor in India is the low costs. While a financial planner would charge Rs 15,000 to Rs 40,000 a year, wealth management companies charge 0.75-1.5 per cent annually of the assets under management (AUM).
In the case of robo advisors, the charges may vary from Rs 1,000 a year to Rs 7,500. Some charge 0.15 per cent of the AUM. A few work on the commissions they get from a fund house or insurers, and the client does not have to pay anything.