Sponsored by SAS
Assessing the opportunities and the potential pitfalls.
Does a robot manage your money? For many of us, the answer is yes. Online and algorithmic investment and financial advice is easy to come by these days, usually under the moniker of “robo-advisor.” Startups such as Wealthfront, Personal Capital, and Betterment launched robo-advisors as industry disruptors, and incumbents, such as Schwab’s (Intelligent Advisor), Vanguard (Personal Advisor Services), Morgan Stanley and BlackRock have joined the fray with their own hybrid machine/advisor solutions. It’s clear that robo-advisors and AI play an important and growing role in the financial services industry, but a question remains. Will robo-advisors disrupt corporate capital allocation the same way they have personal capital allocation? And, will they shake up the trillion-dollar corporate consulting and advisory industry?
Robo-advisors, which were introduced in 2008, are steadily eating up market share from their human counterparts much the way that Amazon and Netflix have taken share from Walmart and Regal Cinemas.
A study by Deloitte estimated that “assets under automated management” (including hybrid offerings) in the U.S. will grow to U.S. $5 trillion to U.S. $7 trillion by the year 2025 from about U.S.$300 billion today. This would represent between 10% and 15% of total retail financial assets under management. At the end of 2016, Fitch Ratings estimated that all robo-advisors managed under U.S.$100B in assets, and predicts double-digit growth in assets under management over the next several years. Finally, A.T. Kearney predicts that assets under “robo-management” will total $2.2 trillion by 2021.
If AI-guided investing can work for a person, can it also work for a company? Corporations buy and employ human advice from many wise advisors—consultants, lawyers, investment bankers—in the same fashion that investors did in the past. Corporate strategy is complex, and the advice is expensive. However, the approaches advisors take are usually data-driven and guided by previous experiences. This is just the sort of problem that can benefit from machine intelligence.
This makes corporate strategy an enormous and untapped prize for “robos” and “AI-enabled” expert advice across the entire enterprise; this market is ripe for disruption much the way the financial investing industry was in 2008. Marketing and sales, manufacturing, recruiting (including people assessment), customer service, and support are all fields that can benefit from artificial intelligence according to McKinsey’s recent research. The reasons for this potential disruption now are many:
Each one of us is becoming increasingly more comfortable being advised by robots for everything from what movie to watch to where to put our retirement. Given the groundwork that has been laid for artificial intelligence in companies, it’s only a matter of time before the $60 billion consulting industry in the U.S. is going to be disrupted by robotic advisors. For those who want to stay ahead of the curve, there are three strategies you can take:
Build a pure-play solution: Several robo-advice companies started their offerings with machine-only advice. Their goal was to hit the lowest possible price point, and to appeal to “digital native” customers. However, as the companies providing hybrid advice have grown rapidly, most startups now also offer some level of human advice—typically for a higher fee. Only Wealthfront remains a machine-only robo-advisor. This suggests that corporate robo-advice providers should think carefully before abandoning the human component completely. At Vanguard, the Personal Advisor Services offering features advisors as “investing coaches” who are able to answer investor questions, encourage healthy financial behaviors, and be, in Vanguard’s words, “emotional circuit breakers” to keep investors on their plans. There are likely to be corporate equivalents of these functions.
Create your own internal robo-advisory service: Companies could develop their own robotic or semi-robotic advice for key decision domains. This is in fact what cancer hospitals, for example, are attempting to do with IBM Watson in cancer care, and what customers of semi-automated machine learning platforms are doing for highly quantitative decisions (DataRobot is one example; Google’s new AutoML is another). However, developing a robo-advisor only for one’s own internal issues may be more difficult and expensive than many companies are willing to venture into. Further, it is decidedly outside the wheelhouse for most established firms, which brings us to the third option.
Partner with or acquire an existing provider: In financial robo-advice, firms that were not first to market are now moving quickly to either partner with a startup or acquire one. Examples include BlackRock, which recently acquired FutureAdvisor for a reported $150-200 million; JP Morgan’s recent partnership with Motif Investing, and UBS’ equity investment in SigFig. There are likely to eventually be a number of vendors of corporate robo-advice, though they are not widely available at this point.
Regardless of which strategy you pursue, it seems likely that corporate robo-advisors are coming to many parts of the organization, just as software has spread through the value chain over the last two decades. Robo-advisors have the potential to deliver a broader array of advice and there may be a range of specialized tools in particular decision domains. These robo-advisors may be used to automate certain aspects of risk management and provide decisions that are ethical and compliant with regulation. In data-intensive fields like marketing and supply chain management, the results and decisions that robotic algorithms provide is likely to be more accurate than those made by human intuition.
Finally, it is becoming clear that serious AI adopters with proactive business strategies based on it benefit from higher profit margins. In fact, a McKinsey survey suggests that these front runners report current profit margins that are 3 to 15 percentage points higher than the industry average in most sectors, and they also expect this advantage to grow in the future. In the next three years, these AI leaders expect their margins to increase by up to 7 percentage points more than the industry average.
Of course, traditional consultants and other providers of corporate advice are unlikely to disappear. Like the human advisors that still complement robo-advisors in the investment world, they can provide a number of key functions. Here are several ways existing corporate advisors can complement their future robot partners:
While the details of adoption of automated advice from robo advisors in all industries are unclear, it is likely that the future will include automated advisors in many fields. They already exist in personal investing, driving navigation (Google Maps, Waze), matchmaking (EHarmony, Match.com), and healthcare (WebMD Symptom Checker). It seems only logical that they would extend into corporate strategy and finance. Financial services firms, financial advisors, and their clients were the first to witness substantial disruption, but they won’t be the last. The days of only face-to-face discussions between client and consultant may not vanish altogether, but they shift from crunching the numbers to changing behaviors and nurturing relationships with clients. As Ian Dodd, Director of legal analytics firm Premonition, said to the BBC, “The knowledge jobs will go. The wisdom jobs will stay.”