Merrill Lynch’s Thematic Investing report, “Robot Revolution – Global Robot & AI Primer,” captured the attention of many industry insiders and led to a flurry of articles from the financial press. The groundbreaking 300+ page report, published November 3, 2015, makes the bold prediction that we are experiencing the “Next Industrial Revolution” the “rise of the intelligent machines.”
The firm’s thought leadership in robotic automation, artificial intelligence, machine learning and internet of things (IoT) has led to a number of insights which, the report states, could boost productivity by 30% in many industries while cutting manufacturing labor costs by 18-33% by 2020. As evidence that this change is well under way, sales of robots exceeded $10B in 2014 and have already transformed the auto industry, where robotic welding has replaced $25/hour union workers at a cost equivalent of only $8/hour.
The rise of intelligent machines will change the way we live and work. Merrill Lynch predicts that 47% of U.S. jobs could be automated in the next several years, and the wealth management industry is not immune. Robo-advisors have the potential to automate investment advice for the affluent and greatly reduce the cost of basic investment advice, freeing up advisors to focus on more value-added services such as planning for retirement, the education of children or other investor goals. Robo-advisors are automated services that use basic financial information, including age, income, stated goals, and a risk questionnaire, to determine an asset allocation for a client’s portfolio. The recommended portfolio allocation is implemented using low cost index based exchange traded funds (ETFs) with algorithms providing services like regular portfolio rebalancing and tax loss harvesting.
“Merrill Lynch estimates that Millennials will hold more than $7 trillion of financial assets by 2018 in the U.S. alone and are set to inherit $30 to $40 trillion from the Baby Boomers in the coming decades.”
The robo-advisor industry was created in 2012 and, according to Ernst & Young, is expected to reach $300B of invested assets by the end of 2016 and more than $2.2 trillion managed by machines by 2020.
Merrill Lynch estimates that Millennials will hold more than $7 trillion of financial assets by 2018 in the U.S. alone and are set to inherit $30 to $40 trillion from the Baby Boomers in the coming decades. Much of robo-advisory will be new demand for low-cost services, with the great majority of assets coming from self-directed funds of the mass affluent and mass market segment, which Ernst & Young estimates amounts to $10 trillion in the U.S. alone.
The opportunity is big, but the complexity of the advisory business, especially for wealthier individuals, suggests there will be winners and losers as the industry works through this transition. There will also be a behavioral challenge, as investors using robo-advisors have never experienced a bear market, generally defined as a greater than 20% decline in asset values. Financial advisors have been instrumental in keeping their clients invested to prevent selling-out at the bottom and thus making their losses permanent. Further, financial advisors play a critical role advising their clients on a variety of issues like estate planning, preparing for retirement, and the sale of a business – all of which cannot be addressed by a machine.
The world is transforming, and innovations like robo-advisors may provide a better alternative for clients who would otherwise self-manage their accounts. Through its commitment to innovation and thought leadership, Merrill Lynch will continue to explore this issue and lead in the wealth management industry as it evolves to best meet clients’ needs.
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