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Are Robo-Advisors Poised to Take Over?

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It’s what some are starting to call “a digital wealth management revolution.”

Advances in digital technologies have made it possible for new financial tech companies to pop up in the wealth management space, challenging traditional advisory models.

One has to look no further than the amount of money being pumped into these startups to see this.

Investment in financial technology tripled between 2008 and 2013 from $928 million to $2.97 billion and is expected to double again to between $6 billion and $8 billion by 2018, according to a report by Accenture. The first quarter of 2014 was the most active on record, with $1.7 billion invested globally. Investment in financial technology in the United States alone could reach $4.7 billion annually by 2018, reports Accenture.

“The big story today is the rash of upstarts who are entering the retail financial services space who are using digital technology to create great customer experience at a lower cost than incumbents can,” said Bill Doyle, vice president and principal analyst at Forrester Research, during a new webinar, “Understanding The Digital Wealth Management Revolution” provided by Xignite, a cloud-based market data provider based in San Mateo, California.

Doyle pointed to companies like Betterment, LearnVest, Wealthfront and Jemstep as examples of growing upstarts. Adding that three digital investment managers now have more than $2 billion in assets under management— AssetBuilder with $635 million as of April 14, Betterment with $500 million as of April 14 and Wealthfront with $1 billion as of June 14.

“In a wealth management industry that’s measured in trillions of dollars, these digital investment managers are still tiny, but they’re establishing a foothold in a managed accounts market that has been dominated by advisor-based firms like Ameriprise and Raymond James,” Doyle said during his webinar presentation.

This is driven in part by consumers becoming increasingly digitally savvy, creating what Doyle is calling “a mobile mind shift.”

More than a quarter of U.S. adults have made the mobile mind shift, and Doyle said this will continue to rise as more older adults connect with more devices.

“The shifted customers expect that any desired information or service is going to be available on any device at their moment of need,” Doyle said. “They judge firms on their ability to deliver.”

Interactions where in-person communication would once have been preferred, such as advisor meetings with clients, are now happening online.

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Doyle said consumers turn to digital channels first to research products, and once they’ve made a decision on an investment product, they transact digitally because it’s easier. He added that clients choose to stay in touch through digital channels because it’s better; they would prefer digital documents over paper.

And millennials, by nature, are digitally astute. Andy Rachleff, executive chairman of the automated investment service provider Wealthfront, credits millennials for the birth of his firm.

“There’s an enormous population of clients that is currently not served by the investment management industry, and they are the millennial generation,” Rachleff said in the webinar. “That’s because the average account size for millennials does not meet the required minimum of the existing suppliers.”

Collectively, Rachleff added, the millennial generation has more than $2 trillion of investable assets, expected to grow to $7 trillion over the next five years.

“In total, this generation is likely to have more assets to manage than the baby boomer generation and there are going to be many more of them,” he said.

The thing about millennials is they “have very different interests in what they want from an investment management solution than what their parents want.”

Rachleff said they want something automated, passive and low-cost.

“In other words, they want an automated investment service,” he said.

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