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Investment Ideas Citi: Robo-advisers will never replace traditional investment managers

Robo-advisers build portfolios that are attuned to the client’s risk tolerance, goals and personal profile.

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It's ok, Charles Schwab Corp. and BlackRock Inc.: Robo-advisers won't be taking away your high-net-worth clients.

At least, that's what Citigroup Inc. is telling clients in its recent fintech report, which has already been garnering headlines.

"We see the advent of robo-advice as an example of automation improving the productivity of traditional investment advisers, and not a situation where there is significant risk of job substitution," Citi analysts led by Ronit Ghose wrote in their report. "Higher net worth or more sophisticated investors will, in our view, always demand face-to-face advice."

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The note comes after Betterment LLC, one of the robo-advisers referred to in the report as a first-mover in this industry, doubled its total funding to $205=million and boosted its valuation to $700-million. Online financial advisers like Betterment, Wealthfront Inc., and Personal Capital Corp. seek to use new technology and algorithms to offer better returns than traditional advisers that have long dominated the space.

While Citi doesn't believe that wealthy individuals will start flocking to this type of advice, it did say that the technology robo-advisers use has a role to play in wider asset management. "We believe the services offered by advisers have the potential to be augmented by virtual and robo-advice tools, increasing individual adviser productivity, and ability to service more clients, or in more user-friendly and/or sophisticated ways," the note said. According to research firm CB Insights, the venture capital advisor of Citigroup, Citi Ventures, participated in Betterment's 2014 round of funding.

The bank also points out that the global asset management industry is massive, with more than $69-trillion in assets currently under management. Mutual funds and exchange-traded funds (ETFs) account for about $30.4-trillion and $2.6-trillion, respectively. Citi says this is a good comparison for the addressable market for robo-advisers since they tend to invest in managed funds and not individual stocks.

So how large could the robo industry actually become?

Citi estimates that right now, robos manage about $20-billion. While that figure could grow quite significantly, it will likely still pale in comparison to the global asset management industry. The bank cites a previous forecast by McKinsey & Co. that robo-advisers could eventually grow to encompass $13.5-trillion worth of assets, assuming that 25 per cent of affluent households (defined as $100,000 to $1-million in financial assets) and 10 per cent of high-net-worth individuals (in the $1-million to $30-million bracket) are enticed by automated investment advice.

"This is not a human vs robot competition where one will win," Betterment CEO Jon Stein said in an e-mailed statement. "There will be customers who want an online driven solution and there will be customers who want the in person relationship, but even those people will expect better technology as part of the relationship."

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