[Investment in the AI Era] ① Growing Robo-Advisor Market... Consumers Need to Get Smarter Too

Robo-Advisor Assets Under Management Grow from 11.6 Billion to 1.8 Trillion in 6 Years
Performance Gaps May Widen with Advancement... Understanding Algorithms Is Essential

Since OpenAI released ChatGPT in November last year, various attempts to utilize artificial intelligence (AI) technology have continued in the industry. The financial investment sector is also increasing investments to keep up with the times. The financial investment industry has been providing advisory services using algorithms called 'Robo Advisor' for several years.

Robo Advisor is a compound word of Robot and Advisor. It refers to AI advising or managing investment assets. It has evolved from simply suggesting asset allocation plans based on data statistics to entrusting management to self-developed deep learning AI. Related services are provided by securities firms, asset management companies, discretionary advisory firms, and banks. Since 2017, the Koscom RA Testbed Center has been evaluating the stability and effectiveness of these technologies.

Initially, growth was centered on fintech, but large securities firms and asset management companies have also entered the market to provide Robo Advisor services. According to statistics from the Koscom Robo Advisor Testbed Center, the scale of Robo Advisor management in Korea was only 11.6 billion KRW in August 2017 but grew to 1.825 trillion KRW as of January this year. Considering that the size of public funds is about 200 trillion KRW, there is great potential for further growth.

Robo Advisors Tailored to the Tastes of the MZ Generation

Robo Advisor refers to an automated digital asset management service based on algorithms and big data analysis that reflects an individual's investment preferences to construct and rebalance portfolios. Generally, it allocates assets and constructs portfolios through investor analysis. Even after initially allocating assets and investing, it provides a service that continuously adjusts the proportions according to market conditions and the nature of fund management.

The Robo Advisor Testbed Center classifies Robo Advisors by service type into free recommendation type, advisory type, and discretionary type. The free recommendation type is a Robo Advisor service where financial companies recommend a single financial product or portfolio for the purpose of selling financial products. The advisory and discretionary types are services provided by investment advisory firms or discretionary investment firms registered with the Financial Services Commission under the Capital Markets Act.

The financial investment industry is actively utilizing Robo Advisors to target the MZ generation (born from the early 1980s to early 2000s), which has emerged as the main consumer group. For the MZ generation, who prefer self-directed investment, services such as investment information delivery and product recommendations have been offered, as well as customized asset management services through dedicated platforms. Mirae Asset Securities, Samsung Securities, Shinhan Investment Corp., and Kiwoom Securities provide their own Robo Advisor services, while KB Securities, NH Investment & Securities, and Hanwha Securities collaborate with existing Robo Advisor companies to offer services.

Robo Advisors can allocate even small amounts of assets and have lower fees compared to traditional advisory services. As AI develops, Robo Advisors are becoming more sophisticated. They not only learn from past data but also reflect current market conditions to propose portfolios. Another advantage is that they can provide services 24 hours a day without rest. Some are also promoting hybrid models that combine Robo Advisor and Private Banker (PB) services for high-net-worth individuals. Providing customers with both digital, automated asset management and face-to-face consultation, allowing them to choose as needed, is expected to become the basic service direction in the financial investment industry.

The growth of the Robo Advisor market is not only seen domestically but also globally. Leading investment banks such as Goldman Sachs, UBS, and JP Morgan Chase are also actively utilizing Robo Advisors. There is an increasing trend of offering basic services for free and charging fees for premium services.

Concerns Over Incomplete Sales Are Growing

The financial investment industry expressed concerns that as the number of Robo Advisor subscribers, who mainly sign up non-face-to-face, increases and demand grows, issues of incomplete sales may arise. As Robo Advisor services become more advanced, there is a high possibility of differences in asset management performance. This means that the asset management results of financial consumers vary depending on the choice of Robo Advisor. Therefore, it is important for financial consumers themselves to understand how Robo Advisors operate and distinguish the differences.

Seongbok Lee, Senior Research Fellow at the Korea Capital Market Institute, said, "The U.S. Securities and Exchange Commission (SEC) judged that it is important for financial consumers to understand how Robo Advisors operate and to use them accordingly," adding, "In 2017, the SEC guided obligations not only to explain Robo Advisor algorithms but also to explain the overall business model through guidelines." He continued, "As the number of Robo Advisor users increases, Europe is also discussing various measures to strengthen financial consumer protection."