Over the last few decades, trading automation has begun to have a significant impact on trading. At first it was only certain traders with sophisticated programming skills that could create a level of automation. Often, traders paid thousands to a programmer to provide even rudimentary trading systems.
In time, trading became more accessible. The access to trading via the internet created a boom for trading, and gave software providers a chance to offer their products to large numbers of traders, prompting them in turn to provide more features to lure more traders to their software. Sophisticated technical indicators, mobile offerings, linkage to money manager accounts and API’s for everyday users eventually led to simplifying the creation of automated trading systems, allowing anyone with only modest technical skills to automate their own trading system.
These systems were made shareable, enabling a trader to make money from their system whilst renting it out to other users. In time, this became so popular that it spawned opportunities to access various automated trading system, with users able to tailor the system and control the levels of trading of a variety of systems at the same time. Inevitably, this led to social trading and its various offshoots.
The influx of technological solutions was not lost on the wealth management industry. For many years, financial advisers serviced anyone that was interested in creating a financial plan. They provided advice on various aspects of financial planning such as estate planning, taxation, and investments, etc.
In recent times, wealth management services have suffered a decrease in popularity. With new investment products like ETF’s and low cost vanguard funds, managed funds, a popular recommendation among financial advisers has suffered from a decrease in interest. Financial advisers have historically subsidized their services by receiving a commission on investment recommendations, but laws requiring advisers to declare these commissions created a growing awareness of the lack of value provided by some financial advisers. The final nail in the coffin of public perception was the GFC, where many lost significant amounts of money in shares and funds recommended by financial advisers.
These factors have left the financial adviser industry at a low point in its history. Increasingly the public has begun questioning the value of paying a financial adviser. With a view to increasing its service levels and modifying costs, the industry has turned to technology to create a better priced solution. Following in the footsteps of trading algorithms is the newest offering from Fintech companies, electronic advisers, EA’s for short.
A significant proportion of financial services companies have been investing heavily in these robo-advisers, as they use the automated strategies to demonstrate financial and investing advice. Companies like Wells Fargo, Blackrock and other investment houses have invested heavily in software to provide these services. As industry demand for automated strategies has increased, feedback has been positive, reinforcing the demand for further supply. In the coming years it is forecasted that automated investment products will manage about $1 trillion by 2020, increasing to $4.6 trillion by 2022. It is a sign of how comfortable the public is with automation that this increase is expected in a relatively small time frame.
Whilst there will always remain those who prefer their wealth management to be managed by people, if automated strategies are able to provide comparable returns they are likely to become a dominant element in the industry.