Tag Archives: Vanguard

Hybrid advisor: the future mix of humans and technology in finances

Hybrid advisors, the mix between technology and humans

Do you remember Robocop? Yes, that kind of police half machine half human. Paul Verhoeven’s film was very successful at the end of the 80’s last century. That proposal (the fusion between humans and machines) is a possible development in finances, but please do not expect a cyborg in a bank or managing fund office.

The adviser and blogger Michael Kitces proposed the approach to the “cyborg” advisor already last year and repeated it somehow some days ago. Robo-advisors have changed deeply the financial landscape. Algorithms, low fees and thin structure are the main characteristics, but humans still play a role in some robo-advisor models. Let’s look, for instance, Personal Capital or Vanguard Personal Advisor Services, where there is a combination of technology and human advice.

A recent report from My Private Banking points out that this mixed advisor model will grow by 2020 up to 3,700 billion dollars and represent the 10% of the total investable wealth in 2025. On the contrary, pure automated robo-advisors will keep only a 1.6% of the market share. It already mentioned a relevant trend: the white label robo-advisors by technological providers for financial entities.

The robo-advisor phenomenon have shown a more complex evolution than it was expected. At the very beginning, it sounded that machines will substitute everyone in the wealth management branch. However, we are evolving to a mixed landscape where pure automatic robo-advisors (Betterment, Wealthfront) and automated platforms for self-directed investors (as T-Advisor) live together in the markets with entities that have developed their own platforms (as Vanguard did) or bought existing companies (as BlackRock did with Future Advisor) and with cyborg wealth managers.

The market has place enough for several models, but it is true that the changes are focusing in providing a “human touch” to algorithmic solutions. Kitces, as we already mentioned, titled his recent post as: “The B2C Robo-Advisor Movement Is Dying, But Its #FinTech Legacy Will Live On!”. The text explained the difficulties of the pure tech model, but accept the revolution in the sector made by technology. In fact, he underlines that technology isn’t replacing advisors, but increasing the number of them. Wealth managers accepted technology and they are learning how to use it and improve their results. My Private Banking proposes also different approaches and strategies to robo solutions depending on the customer segments.

In conclusion, the financial sector is already aware that robo-advisors are not anymore fashion: they are a stabilised solution in the market and they are real competitors to the classical individual human-to-human relationship in advising. But the sector finally learned. They have forgot the negative opinions and adopted a different view. Technology is an ally and human advisors have to play the battle in this field if they want to survive. The hybrid advisor model is a kind of solution that will complete progressively the wealth-managing sector with the traditional and the pure tech model. Let’s see the trend in the next years and the market share that they will take up.

ETF, the asset revolution has consolidated

Exchange Traded Funds, or ETF by its initials, are the trendy security in the last years. Their assets have doubled in the last five years, as this BlackRock chart shows, although there is a reduction in January 2016, because of the general volatility of the equity markets:

Global ETP assets by year. Source: BlackRock

ETF are there to stay. There will be no reversal. In this short history (although they exists since the end of the 1980’s), there have been a few entities that have specialised in creating and selling these products: iShares by BlackRock, Vanguard and State Street, as the following table shows:

Global ETP providers. Source: BlackRock

But why are ETFs so successful? Why is there an offer from a few to 1,800 different products in so short period of 10 years? Flexibility, low fees and trading like stocks are some of the advantages against traditional mutual funds. Although there are also some disadvantages, investors still look at them as a very attractive asset. The explosion of them as a business contributed to create a long list of specialised media in Internet, because professionals and individuals have been looking continuously for information about them.

The design of an ETF is very different depending the cases: equities, fixed income, money market, commodities… They replicate an index or track a collection of securities or sectors in the known as passive management. After creating the product, there are only some adjustments every certain period, but the product performs independently of the manager.

In T-Advisor, our Watchlist has a long list of ETF categorised by their strategy for our registered users:

T-Advisor ETF Watchlist

It is just an option, but it is interesting to consider because of its price transparency linked with diversification. You invest in a diversified product, that means that you reduce some risks, and you have steady information of the price fluctuation, against mutual funds, whose prices are updated when markets are closed. In costs, they are cheaper than mutual funds. Yes, they are more expensive that a share, but you have to consider the above-mentioned diversification.

This is probably the reason of the success: the combination of the flexibility and transparency of a share and the diversification of a mutual fund. A survey conducted by EY in 2014 already talked about the promising future of ETFs amongst wealth managers and invertors. That future is already here.