An Academic Article that Claims Human-Based Advisory Services Face Serious Challenges

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An Academic Article that Claims Human-Based Advisory Services Face Serious Challenges

Robo-Advisors and Wealth Management

  • Kokfai Phoon and Francis Koh
  • The Journal of Alternative Investments, Winter 2018
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.

What are the Research Questions?

According to Treanor [2014], the banking sector is likely to see more change in the following 10 years than it did in the past two centuries because of innovations in financial technology, or FinTech. The authors ask the following questions:
  1. Are robo-advisors adequately meeting the needs of clients?
  2. What are the gaps in client services? Which services are needed but not served?
  3. What can robo-advisors do into the future?

What are the Academic Insights?

By surveying the current robo-advisors landscape the authors find the following:

  1. NO- The current cohort of robo-advisors is still at a very early stage of their potential.  Client profiling uses simple surveys to assess client needs and asset allocation, portfolio monitoring, and rebalancing are generally not rigorous.
  2. Gaps include estate and retirement planning, insurance requirements, and tax planning (other than tax-loss harvesting)
  3. Suggested improvements  for the future of robo-advisors:
    1. RETIREMENT PLANNING:  Wealth managers who assist clients in retirement planning have to deal with actuarial life expectancy, lifetime income, potential inflation, market outcomes, product returns, and utility of income. Robo-advisors may help in managing some of these factors by using data analytics and simulations
    2. ESTATE PLANNING: Simulation and data analytics may help the client to decide on appropriate intergeneration asset transfers. This may include the use of mega-insurance and other investment solutions with efficient tax structures (Bernstein Wealth Management Research,2005). Often, intergeneration wealth planning is complicated by patriarch issues, sibling rivalry, and philanthropic objectives. Using goal programming is one approach to assist in this complicated private wealth management function (Mulvihill, 2005)
    3. TAX PLANNING:  Three likely types of mismanagement of taxable assets are (1) unnecessary realization of capital gains, (2) failure to harvest losses, and (3) failure to prefer lower-dividend stocks.  Rules and algorithms can be customized to recommend combinations of assets and securities from different source countries that are tax-beneficial to clients, depending on their country of residence
    4. INSURANCE MANAGEMENT: A robo-advisor may also add insurance products as a solution for clients who need wealth and/or income protection. Insurance management can be used to mitigate issues of mortality and health risks
    5. CLIENT EDUCATION: Robo-advisors would do well to provide more client education and online training to help individual investors make more informed investment choices. An interesting way to start is to provide clients with various options, starting with a great deal of hand-holding and progressing to a stage at which clients make independent decisions using robo-advisory support like market and securities information and analyses, after a period of experiential learning
    6. MOBILE PLATFORM: With the increased use of the mobile phone as a communication and personal planning tool, a smartphone can be the device for payments as well as investment execution. Wider and improved platforms will increase the use of robo-advisory.
    7. ARTIFICIAL INTELLIGENCE: Use of data analytics and artificial intelligence can lead to a better matching of investment opportunities with the needs of clients and lead to improved investment outcomes, including satisfying behavioral preferences. Furthermore, such software may be made available to more sophisticated clients to enable them to gain insights into financial markets and the fast-changing environment. With better analytical tools, clients may avoid some human judgmental errors and behavioral biases (Reiff, 2017). Use of such software may allow investors to have enhanced capabilities to compete with institutional investors.
    8. ENHANCED CLIENT SERVICING: Data chatbots (Burnmark, 2017), which are artificial intelligence tools, can provide intuitive answers to generic customer questions, thus freeing up relationship managers to focus on complex requests and products. Chatbots would allow robo-advisors to enlarge the client base, catering to another market segment that embraces technology and social media.

Why does it matter?

This study contributes by mapping the current state of robo-advisory with the potential future of robo-advisory. The authors conclude the paper with an interesting question:

Will robo-advisors replace traditional wealth managers?

Their answer is provocative:  YES!- Robo-advisors are able to combine the judgment and computing resources of both “man and machines” or “bionic power” to provide alternative wealth management services. Robo-advisors, with the help of appropriate technology and innovation, will in the longer term commoditize the simpler and technical aspects of wealth management.

The Most Important Chart from the Paper:

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.


The recent rise of robo-advisors (RAs) has threatened the traditional fund and wealth management industry. RAs’ assets under management (AUM) have risen manyfold through competitiveness on pricing, transparency and services and better expected returns linked to the use of quantitative finance and technology with less subjective human intervention. This article examines the postulation that RAs have an edge over traditional wealth managers. RAs can combine the judgement and computing resources of both human and machine, or bionic power, to provide alternative wealth management services to meet the diverse needs of private wealth clients. However, the authors expect traditional wealth managers to respond by providing new and improved customized and integrated services at competitive fees.

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Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen are currently writing a book on research-backed investment ideas. You can find additional information at Academic Insights on Investing.
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