The German bank believes that the client segment currently using robo-advisers is a microcosm of how future generations will manage their finances and interact with banks, owing to their values, digital habits and the way they access information.

The paper, entitled ’German robo-advisors: march of the machines driving passive investments’, finds that current users of robo-advice platforms are not only digitally-savvy, but value a high standard of living and enjoyment and pride themselves on testing new approaches and exploring new things.

These all being characteristics associated with younger people, as compared to older generations who are more likely to favour preservation and maintaining order and balance, suggest that these will be the values of the mass-market client base for banks in the years ahead, according to Deutsche.

While digital convenience is also a high priority for robo-adviser users, they are still frequent visitors of branches, suggesting face-to-face interaction will remain of high importance.

“There’s a tendency to believe that in the future everything will be digital, and digitisation will change how clients and banks actually interact with each other, but that’s not necessarily the case,” Orçun Kaya, senior Deutsche economist, tells Finextra Research.

“So, banks need to be more digital and more efficient, but maintain their traditional access points in the future.”

Surprising conclusions

While the assumed knowledge of robo-advisers is that they appeal to younger people and those with less investment capital, Deutsche’s research suggests something different.

A typical robo-advice client is aged between 45 and 54, earns on average three times the median income of a client at a bank, and is 80% likely to be male.

“This was surprising and paradoxical,” Kaya says. “The initial idea was that these tools would contribute to financial inclusion, appealing to people with less income or less money to invest, but that doesn’t seem to be the case.

“However, as they mature, these services will capture clients on lower incomes and those with less money to invest. Maybe with a bit more marketing over time it will evolve more in line with expectations.”

This is consistent with the forecast that clients who value being digital pioneers will “dominate the society in the future,” according to Deutsche.

Saving to investing

German people are among the biggest savers in Europe, saving around 11% of their disposable income in 2018, compared to averages of 5% in the Eurozone and 1% in the UK. With interest rates at or below zero, there is an opportunity to steer clients towards investing to acquire more competitive returns on the €2.3 trillion held in retail deposits in Germany, as of Q3 2019.

Deutsche also believes the investment market in Germany could be in for a reinvention in the years to come. Should the popularity of robo-advisers continue to grow, they will drive greater investment in exchange-traded funds (ETFs).

The primary investment tool of robo-advisers, ETFs are more passively managed than mutual funds and their structure allows for free trading between investors, making them far more liquid, cheaper and more attractive to the retail investor without a huge amount of working capital.
At present though, for every euro invested in an ETF in Germany, €18 are invested in more costly mutual funds.

This disparity is down to a couple of key factors. The first is the prevalent pay-as-you-go pension plan in Germany, which means people are less involved in managing their retirement plans themselves and do not acquire a great deal of capital for later in life. This means they are less likely to be familiar with new financial products like ETFs.

The second factor is the universal banking model. Banking groups either have their own asset management divisions or work with a select few partners, and so clients’ money is generally invested in the retail funds of these institutions which earn the bank the higher commission. This means the overwhelming majority of retail investors’ money is put into actively managed funds rather than ETFs.

ETFs’ growth potential

Kaya believes that use of a robo-advisory platform and the increased exposure to ETFs that comes with it will present greater possibilities for retail investors in Germany.

“Once people realise that they can use these tools to invest in capital markets with a modest amount of money, and receive decent returns for the long run without having to worry about rebalancing their portfolios, attitudes may change”, he says.

Retail investors generally favour low costs, healthy ongoing gains, and, most importantly, liquidity, which mutual funds do not offer.

“As a retail client, a mutual fund might earn you a good return this year, but you cannot expect the same performance next year,” Kaya says, “so ETFs make much more sense.”

Despite its relatively small stature, the ETF market in Europe grew more than five times between 2009 and 2019. Continuing a similarly healthy trajectory over the next few years, Deutsche estimates that robo-advisers could be managing €25-30 billion in ETFs by 2025, compared to €4bn today.

Any increase in the size of this market could set create a positive feedback loop as more retail investors put their money into ETFs, further growing the market and the returns, fulfilling its “exponential growth potential”, as Deutsche Bank describes it.