Ask fresh graduates, low income earners or novice investors what they think about financial instruments like treasury bills, stocks and mutual funds and you would probably hear them say they are ‘too expensive’ or ‘designed for the rich’. Back in 2017, the minimum amount to invest in treasury bills increased from 10,000 to 50 million Naira. These days, investors with less than 50 million Naira are forced to opt for the secondary market (owners of treasury bills issued from the primary market can resell without holding till maturity). While the secondary market provides a plausible option for low income earners, there is still a problem. Investment houses who sell bids from the primary market or bid on your behalf (through crowdfunding) to offer a modified interest rate based on your principal and tenor, usually accept a minimum of 100,000 Naira. Similarly, stock brokers provide their services to people willing to offer a minimum of 50,000 Naira, while the professional fees charged by fund managers (when you open a mutual fund account) can discourage you from investing anything less than 50,000 Naira.
The rise of financial technology (fintech) has certainly blessed us with a plethora of benefits. Fintech organizations are usually startups created to disrupt existing financial models by offering software solutions not provided by larger financial corporations. Over the past few years, the startups have used technology to increase access to finances (make payments, automate savings, apply for loans, etc.), improve financial literacy and provide low cost investment opportunities.
In an interesting turn of events, fintech companies are improving online investment opportunities through the introduction of robo advisors. In the past, office visits were scheduled to seek the advice of stockbrokers or investment bankers to get the right information on stocks, exchange traded funds or mutual funds. Robo advisors however seek to flip the script by providing automated investment advice at a low cost by employing a portfolio management algorithm through a mobile enabled device. The algorithms are designed to choose an investment plan by taking your principal, risk tolerance, desired return on investment and duration into consideration. In some cases, robo advisors handle asset allocation automatically, saving customers the hassle of constantly seeking advice from professionals.
These self-guide online wealth management services were introduced during the financial crises of 2008 and by 2015, over 100 fintech startups (predominantly in the United States, but also Europe, Asia, and Australia) offering financial advisory services through robo advisors were managing about $60 billion in assets (this is estimated to hit $2 trillion by the end of 2020). It is probably not so hard to fathom why robo advisors are flourishing. The ‘big idea’ offered by robo advisors is their ability to provide low cost alternatives. In other words, provision of wealth management services for the masses. By eliminating professional fees, online wealth management platforms offer the same service for a fraction of the cost. For instance, human financial planners typically charge between 1-2% compared to the 0.5% charged by robo advisors.
Typical to technologically inclined financial products, robo advisors are available to clients 24/7 (as long as you have an internet connection). Plus, anyone can have access to financial advisory services which were once available to only high net worth investors. The hallmark of the robo advisory industry is to create digital wealth management platforms attractive to millennials or generation x investors. This segment of the population is not only more technologically inclined but also comfortable sharing personal information online.
The advantages offered by robo advisors have redefined traditional roles to an extent. However, there are a few things they can’t do. High net worth individuals still need human professional advisors to provide information and access to profitable business sectors (agriculture, real estate, etc.). Unfortunately, automated services can’t help you invest in individual stocks, bonds and currencies. They also lack the sophistication to provide a well-rounded investment plan which consists of estate planning, life insurance, trust fund administration and financial planning for retirement. In fact, most robo advisors don’t provide access to more than 25 funds- typically exchange traded funds and mutual funds. Automated services are best suited for beginner investors and young professionals who want quick and easy investment solutions.
Given the hits and misses, do robo advisors have any potential in Africa (especially Nigeria)?
Deloitte’s report exploring the rise of the African middle-class notes that for over three decades, the population of the middle class has tripled (one in three people are projected to be living above the poverty line, but not considered to be wealthy). Considering the appeal of robo advisors to millennials, a Mickensy report published in 2013 reveals that Africans aged 16-34 account for 65% of the continent’s consumer spending. In Nigeria, there’s also an emerging middle class. Nigerian households with an income of about $5000 a year will increase to 27% of the population by 2020. Taking advantage of this surge are banks and fintech startups who offer crowdfunding investments and mobile banking services. There is a chance for automated investment firms offering robo advisory services to thrive in Nigeria. They would however face stiff competition from banks who are purchasing or partnering with fintech startups to offer customers convenient financial services.
Although robo advisors were designed to provide easy and accessible investment opportunities, they fail to provide clients with comprehensive financial advisory services. They can’t readjust a financial portfolio to suite life changes. Knowing their limitations and being hungry to target a new segment of the population, the top fintech startups offering robo advisory services are currently targeting high net worth individuals. For much higher fees, the startups are offering private wealth management services to clients willing to invest $100,000.
As expected, there are doubts high net worth individuals will be willing to entrust huge amounts of money to robo advisors run by startups. Traditional financial institutions have been around for a while and have earned the trust of high net worth individuals. For now, robo advisors have products that are best suited to serve the masses. If you are a young professional, novice investor or need a simple portfolio, they can be an effective option.