The Opportunities and Threats of Shariah-Compliant Robo-Advisors

The Opportunities and Threats of Shariah-Compliant Robo-Advisors
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Advisory service preferences

According to a study conducted by the firm AT Kearney, 3% of banked customers use a robo-advisor platform. Also, after surveying 4,000 US consumers, nearly half of them expressed that they had some interest in robo-advisors. This is bound to put pressure on big banks that have wealth management divisions, in addition to smaller registered investment advisory firms.

Uday Singh, a partner in the financial institutions practice at AT Kearney says that robo-advisors have been a classic disruption of advice. The main customer base is below 35 years of age with money to invest and adequate financial skills to work with a robo-advisor and have the realisation of not trusting a bank. One retail banker says, “It’s come to the point where the younger American investor would rather trust a robot than a financial advisor.”

On the other hand, another survey conducted shows that 77% of surveyed wealth management clients trust their financial advisors. Additionally, 81% say that face-to-face contact is important. There are further comments that personal advisory services are still a much-preferred feature of financial advisors and they occupy the position that current robo-advisors cannot fulfill i.e. to adequately meet the needs of investors with complex financial needs.

Opportunities for traditional advisors

Shariah-Compliant Robo-Advisors
Robo-advisors are not intended to replace human financial advisors but rather to work in tandem with them.

Consulting firm Accenture is certain that financial advisors won’t become redundant. Thus, financial advisors will continue to play a central role to wealth management, but robo-advisors will bring forth new facilities that wealth management firms will need to incorporate. In Accenture’s view, robo-advisors will complement financial advisors, rather than replace them.

In the same way, Ernst and Young states that while robo-advisors provides an effective platform for investing, the value of the human aspect cannot be stressed enough. 

Similarly, according to CGI Group Inc, there is a trend in robo advisor services, where financial advisors are using computer programs to assist them in giving investment advice and managing client accounts. Therefore, the majority of investors with wide-ranging needs are gaining major advantages from this model (i.e. a hybrid advisory model providing digital advice for a digital world, but with humans steadfastly in control.)

Related: What are the Benefits of Investing via robo-advisors?

Future opportunities of robo advisors

Shariah-Compliant Robo-Advisors
It is expected that rapid progress will be made toward the creation of an automated adviser assistant capable of providing complex advice.

As mentioned by author JakeFrankenfield, robo-advisors are currently useful entry-level tools for millennials i.e. those with small accounts and some degree of investment experience, but far from adequate for those who require sophisticated services such as estate planning and retirement planning.

In the near future, Accenture expects that the abilities of robo-advisors will considerably rise in competition, improvement and new technology. Upcoming versions will take into account the client’s intricacies by adjusting questions based on previous responses. 

When creating a financial plan, robo-advisors will be able to incorporate several goals, including college savings, protection needs, planned home acquisition, retirement, estate planning and the need for health care.

Over the next few years and beyond, Accenture notes that developing technologies such as perceptive computing will control major developments in robo-advisory abilities. Accenture expects a fast advancement towards an automated advisor assistant that will even be able to offer complex advice.

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CGI Group Inc. recognizes that the more sophisticated platforms with artificial intelligence can not only examine a client’s behavioral profile but also estimate future life events and thereafter recommend methods for advisors to manage such events. Based on client needs and activities, the platform may even be able to identify potential areas for new product development.

As summarised clearly in a video interview from World Finance: “If you imagine an online solution that aggregates your financial data across your savings, your investments, your pensions; even your partner’s financial status. And then uses an algorithm to create holistic advice based on all of your financial position, and based on your goals and ambitions, your tax status, your investments. I think that’s potential what robo-advice the future is for.”

Opportunities for robo-advisors in the HNW (High Net Worth) market

Regarding the enthusiasm of HNW and mass affluent clients’ in engaging with digital advice, MyPrivateBanking’s survey reveals: “The majority of affluent and high-net-worth individuals recognise the potential of robo-advisors and automated investment services to add value to their wealth management services”.

In Accenture’s 2015 paper titled ‘Serving the High Net Worth Investor’, it was put forward that not only would HNW investors rather choose digital engagement, but these investors also view robo-advisors as entirely complementary to a human to human relationship.

According to Deloitte, the best approach for HNW investors will likely be a hybrid robo-advisor model i.e. one that merges an excellent digital experience with qualified, human-led advisory services.

Opportunities for banks to implement robo-advisors

Shariah-Compliant Robo-Advisors
There is a significant amount of enthusiasm among investors for their banks to provide digital portfolio solutions.

As shown by KPMG’s own research of 1,500 bank clients, investors have a strong interest intheir banks offering digital portfolio solutions. Banks would be negligent to overlook the opportunity of including robo-advisors in their product portfolios. Therefore, banks should act now to secure their share of the market, or else clients will sooner or later look for these solutions at other institutions.

Uday Singh, from the financial institutions practice at AT Kearney confirms, “US banks need to adapt to capture future revenues in new ways. Where banks don’t deliver the new kind of banking they seek, robo-advisors. increasingly fills the gap in the market, especially in the retail and affluent segment…There is a big opportunity here. The regional banks that already have the client base could easily tie up with a tech firm for a white-label robo advisor platform”.) Hence, there is a massive opportunity for local banks in the United States to include a new robo-advisory revenue stream.

Related: Islamic Fintech – A Threat for Islamic Banks or an Opportunity?

Bottom Line

In the last few years, robo-advisor developments have brought about fears that advisors would be dismissed by technology. However, it has become certain that advisors are now considered highly important. An automated advisory platform is able to strengthen advisors’ capabilities, making sure that clients are offered valuable advice.

Robo-advisors provide an opportunity for investors who lack large amounts of money. It is an opportunity to receive services similar to a professionally managed investment portfolio. On the whole, Shariah-compliant robo-advisors have allowed the global Muslim community to take part in international financial markets by making investing both accessible as well as morally compliant. Robo-advisors are even open to non-Muslims who have an interest in ethical investing.

As discussed, Shariah-compliant robo-advisors have the potential to offer an immense opportunity to many different markets including traditional financial advisories, high-net-worth (HNW) clients, and Islamic banks globally as well as those individuals/banks keen to carry out ethical investment alternatives.

The opportunities of the Islamic financial advisory industry will significantly rely on technology, and those firms that fall behind will inevitably fail to benefit. It is recommended that traditional Islamic banks should consider working together with fintech companies. Therefore, firms and Islamic banks should not be deciding whether or not they will set up robo-advisors, but rather when it should be done.

Therefore, the adoption of Shariah-compliant robo-advisors have the potential to revolutionise the Islamic Finance industry through its positive integration as opposed to its feared future domination, providing major opportunities within the global Shariah-compliant advisory industry.

Related: 5 Entrepreneurs who are Making Waves in the Halal Industry

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