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Perspectives

The Rise of Robo Advisors (Part 1)

2017-09-19


Here’s how European wealth managers can incorporate automated advisory services into their current offerings to expand their market to the mass affluent and meet the needs of emerging wealthy investors.

The rise of robo advisors (automated advice) is shaking up the conservative wealth management industry. While automated advisory systems have mainly been used by fintechs and other global investment managers to serve the mass affluent demographic, these tools will likely grow in sophistication and relevance to high-net-worth and ultra-high-net-worth (HNW and UHNW) investors, particularly younger generations. 

Robo advisors could also help established wealth managers expand their services to the mass affluent/emerging wealthy client base if they intelligently realign their business models. By combining the human touch of an experienced advisor with the logic, fee transparency, methodology and accessibility offered by a robo advisor platform, established advisory firms can significantly strengthen their practice models. In this hybrid model, wealth managers combine low-cost automated portfolio management with high-touch services such as comprehensive financial planning strategies.

European wealth managers lag behind their U.S. counterparts in embracing robo advisory models. We believe there are four potential evolving opportunities for European full-service wealth managers to meet the needs of the new generation of investors: 

Figure 1

Factors to Consider Before Making the Leap

Before adopting robo advisory capabilities, organizations should carefully consider the following:

Products and investment strategy.

Robo advisors’ asset allocation is usually made up of low-cost exchange traded funds (ETFs) across multiple asset classes, which maximize returns for the level of risk acceptable to the customer. Firms need to consider:

  • Are ETFs already part of the existing asset universe?

  • In which other asset classes does expertise need to be developed in order to offer more automated, low-cost solutions?

  • Do existing model portfolios leverage product segmentation that may support automated/self-service models?

Sales channel.

Working with a robo advisor system increases sales efficiency by granting access to advisors. Key elements to consider when reviewing new/hybrid sales models leveraging automation include:

  • What are the business goals — extend client coverage, improve client experience, provide more self-enablement, etc.?

  • In addition to automating advisory processes, what other digital initiatives are being considered to improve sales efficiency?

  • How will these digital tools be deployed to maintain and improve clients’ “high touch” experience?

  • How will clients be educated to increase their awareness of self-service options and enable them to best leverage the new automated offerings?

Fee structure.

Robo advisors offer lower fees and minimum investment thresholds for discretionary portfolio management as compared with traditional wealth managers – typically less than 1% of assets under management (AuM) for investments of USD $1M or less. Incorporating these fintech solutions into wealth managers’ core offerings poses some questions:

  • How will the organization pass on the benefits of automation to its HNW/UHNW clients (i.e., reduce fees based on usage of alternative channels, or improve the user experience such as offering more advisor time, etc.)?

  • Has the organization planned/developed business cases for extending its offerings (either fully automated advice or advice on-demand) to other client segments?

Technology.

The primary technologies that enable robo advisors to provide effective, unbiased financial advice are artificial intelligence and process automation. Important questions to consider before adopting these disruptive technologies include:

  • What is the current level of in-house technology competencies?

  • Does the firm offer any new digital capabilities, such as gamification, investor communities, collaboration, online training and information, to its clients?

  • What is the investment appetite to support and drive digital ecosystems that would help improve the efficacy of automated advice?

  • How scalable are current-state advisory and booking platforms? Services to client segments such as the mass affluent are likely to significantly increase processing volumes.

  • What integration challenges does the organization anticipate in offering automated advisory platforms that work with the current infrastructure? 

Legal and compliance.

Robo advisors are subject to the same regulations as traditional wealth services providers. Some of the key questions in this realm relate to interpretation and applicability to software and algorithms, when providing digital advice: 

  • What is the planned approach for monitoring and overseeing automated advice, particularly in the self-service channel, in view of regulations governing investor protection and the client’s best interest?

  • How can the firm effectively balance advice in hybrid/advice-on-demand models, in which the client starts with self-service but subsequently needs human advisory services?

Build, Partner or Buy

Many leading wealth managers are currently incorporating robo advisory capabilities into their current offerings, using a variety of approaches:

  • Partnering with robo advisor firms: Some firms are choosing to work with partners (e.g., Wells Fargo and Sigfig), which speeds response times and reduces costs without impacting client relationships. By relying on partners that already offer robo advisory services, these firms can more quickly realize the advantages of process automation, cost reduction and attracting new customers. This model involves a trade-off between avoiding costly infrastructure changes and limiting flexibility.

  • Building in-house capabilities: Others, such as Vanguard, are augmenting traditional advisors with an in-house robo advisory platform that serves clients and new investors. This enables advisors to promote a low-cost alternative to traditional advisory services and provides the flexibility to offer varying functionality to attract new investors.

  • Acquiring established robo advisors: Still others (e.g., Northwestern Mutual’s acquisition of Learnvest) have purchased robo advisory capabilities to accelerate their time to market. However, integration with the acquired platform poses multiple challenges.

To learn more, please read parts two and three of our series on robo advice. A ‘Wealth’ of Opportunities Beyond Robo Advisory (Part 2) and Robo Advice: From Challenger to Stepping Stone (Part 3).

For more, please read our full report, “Emerging Trends in Automated Wealth Management Advice,” or visit the Asset and Wealth Management section of our website.

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The Rise of Robo Advisors (Part 1)