In Profile

A Conversation With Mike Ellison

Robos and the Next-Generation Investor

by P.E. Kelley

Mr. Kelley is managing editor of this magazine. Connect with him by e-mail:

Within the overarching discussion of the emergence of Robo-Advisors, there is certainly a perceptible self-conscious tone, one informed by self-preservation and a sense of threat. But to presume out of hand that advisors will ever be truly replaced by machines misses the salient point: our technology is driving us to develop newer and more automated systems that leverage incredible advantages and efficiencies for managing the wealth of our clients.

With acceptance, and adaptation, there is a promise that may advance the advisory industry in quantum leaps. Many companies have already jumped in with both feet.We spoke with Michael Ellison, president of Corporate Insight, a technological research firm focused on developing strategic-digital solutions for the financial services market. He spoke with us about his company’s seminal 2013 report, Next-Generation Investing: Online Startups and the Future of Financial Advice, and the implications for automated, online managed accounts. In essence, it moves the investment advisory off the old tracks and onto a high-speed rail of client outreach and connectivity.

PEK: Which came first, the chicken or the egg? Is the industry venturing into mobile-access marketing and the digital sales process because the technology is here or because the target audience, younger clients in particular, prefer to do business this way?
ME: In a way, it’s a bit of both – but I think it’s incorrect to ascribe younger audiences as being the only driver of mobile. People across the age spectrum are all relying more on mobile devices to serve their needs whenever and wherever. You could also argue that companies like Amazon, Apple and Facebook are driving consumers to pull their financial services companies into the mobile space. As non-financial, retail oriented companies continue to adopt a “mobile first” strategy, consumers get used to operating in a mobile-only environment. Thus, they expect all companies – including their financial services firms – to be able to provide services for the mobile platforms.

PEK: Also, What does the emergence of the robo advisor say about the existing advisor workforce, which is known to be rapidly aging?
ME: In survey work we’ve done, advisors (the human kind) view their relationship with their clients as a key element in their value proposition. If these advisors view digital advice platforms (i.e. “robo advisors”) as a product vehicle – that is, an investment service they can provide clients – then the age issue shouldn’t matter. Where the aging advisor workforce is a problem is the fact that younger folks are not becoming advisors at a fast enough rate to replace retiring advisors. Bringing these two issues together – digital advice platforms and the thinning ranks of advisors – could mean that we will continue to see more and more reliance on “robo advisors” since they can allow their human counterparts to be more efficient.

PEK: Having mobile-optimized sites with responsive designs and cutting-edge tools are now being eclipsed by Millennials’ preference for native-apps. What does this mean to financial services companies trying to meaningfully connect with this demographic?
ME: Financial services firms will continue to need to connect with their customers – Millennial or otherwise – where and when the customer demands it. For financial firms, this could actually mean they need to rely on a mix of both responsive design and native apps. As companies try to market to an increasingly mobile-only prospect universe, they will need to rely on responsive design to be the initial interaction with the prospect. It is highly doubtful that an initial reaction to an ad will be to download an app. Thus, someone may respond to an ad by going to the company’s website on their smart phone, and that landing page will need to be properly rendered for that device. Once a relationship has been established – i.e., when they are a customer – then servicing them via a native app will be essential.

I think it’s also important to consider that just because a financial firm may have the technology stack that Millennials typically appreciate – mobile, social, etc. – that alone will not win over the Millennial customer. Things like transparency (in fees, mission, etc.), social commitment (i.e. to one’s community) and integrity are the factors that will increase the odds of working successfully with this audience.

PEK: What else have you learned about the online habits of this Millennial audience that resonates so loudly with the challenge to connect with them, educate them and, ultimately, make them clients?
ME: One of the biggest differences with Millennials when compared to Gen X or Boomers is that they are much more “networked” than the other cohorts. While this is often simplified as “they are on social media,” I think it’s more than just being on Instagram or Snapchat. Yes, they grew up on Facebook and social networking, but the result is they rely on their network – family, friends, co-workers – in ways other generations don’t. When I was in my 20s I could read Consumer Reports or rely on J.D. Power awards. Now, young consumers will read commentary and reviews from actual clients on Yelp, they will search Twitter and they will tap their social network for their opinion. The result is, if a financial firm says they have the “lowest fees” or “best service,” Millennials will check on their networks to verify those claims, and if they find anything to the contrary, they will likely lose trust in you.

PEK: Your research has discovered that while some 58% of Millennials demand online, digital access for much of their consumer activity, usage for financial services remains low. Is there a disconnect and, if so, how can the industry improve participation?
ME: It depends on how you are defining financial services here. Millennials almost all have bank accounts and rely on their banks’ mobile platforms. However, it may be that usage remains low in other areas of financial services like brokerage, mortgages and life insurance. I don’t think this is due to a “disconnect,” but rather life circumstances that are different from prior generations. More Millennials have student debt than other generations, which can lead to limited disposable income and savings. This means it has taken longer for this generation to save to buy a home, and Millennials tend put off marriage longer. As a result, there is less of a need for mortgages and life insurance. It will be interesting over the next few years to watch whether this trend starts to reverse itself as the older Millennials are starting to buy homes, move out of the cities, get married and raise families.

PEK: When it comes to educating themselves about their retirement plans and accounts, at what point do young people forgo digital access and robo advice, and seek out a live person to discuss it with? In other words, just how ‘robo’ is a ‘robo-advisor’?
ME: The simple answer to this has to do with age and money. I tend to think of “robo-advice” as very valuable on the early end of one’s financial life spectrum. These platforms have lower investment minimums, lower fees and are pretty flexible and diversified. They are great platforms to begin a relationship with a financial services company, and I think that’s why you see large financial companies embracing them. But, at some point, one’s financial life will require more guidance than a simple risk-tolerance algorithm can provide. When you start making six-figures in income — saving for college for your kids or when your portfolio reaches $250,000 or more – these things will drive the need for additional advice, and the firms that have developed a relationship early on in the investing lifecycle via robo platforms should be best positioned to take advantage of this.

at some point, one’s financial life will require more guidance than a simple risk-tolerance algorithm can provide... and the firms that have developed robo platforms should be best positioned to take advantage of this

PEK: Your research indicates that ‘robo-embracers differ from other investors in key ways’ – please elaborate on this.
ME: Robo Embracers tend to be more diverse than the general investor population, and they are older than you may think. We found that 45% of Robo Embracers are female (compared to 32% for the general investor sample), and 75% identified themselves as “white” (vs. 88% from the overall survey). Moreover, as many as 12% of investors interested in digital advice identify as Asian – more than double the 6% Asian population from the overall sample. With Hispanic investors, the gap is even bigger: 12% of Robo Embracers are Hispanic, versus 2% for the overall sample.

In terms of age, our data show that the concept of robo advice appeals more to the Millennial generation relative to Gen X and Baby Boomers. Forty-six percent of Millennial investors indicated they would consider using an automated online managed account service, compared to 36% of Gen Xers and 22% of Baby Boomers that said the same. This broad view, however, paints an incomplete picture. When we analyze the survey data to create a profile of Robo Embracers, we found the average age of this investor segment is 44 years old, suggesting these services appeal to more mature investors than conventional wisdom suggests. By comparison, the average age of the rest of our survey respondents is 59.

Asset levels were also somewhat higher than you might expect: while our data support the idea that digital advice does not have strong appeal among wealthy investors, the results also show that a significant number of Robo Embracers have sizeable liquid assets. Twenty-two percent of Robo Embracers report holding between $100,000 and $200,000 in household liquid assets, while 43% hold between $200,000 and $500,000.

Beyond these demographic profiles, the investing habits and preferences of Robo Embracers are distinct from the rest of the investor population. One of the numerous differences we found between Robo Embracers and the rest of the population is that the former group wants greater access to education and planning tools. The data also show, among other things, that Robo Embracers desire modern technology and the ability to manage their accounts via a mobile device. In fact, not only were Robo Embraces twice as likely to say that mobile capabilities are very or extremely important, they were also far more likely to access their brokerage account via a mobile device (83%) in the previous 12 months compared to the rest of the population (45%).

PEK: Many companies are identified as ‘disruptors.’ Does the Robo-Revolution give them a foothold to compete in the wealth management space?
ME: Incumbents leading in the digital advice space generally share a few strategies in common that separate them from the rest of the pack, including:

• Using investor questionnaires integrated with thorough risk tolerance assessments (i.e., Schwab, ETRADE, Merrill Edge), as opposed to asking prospects to self-identify their risk tolerance or assigning a risk tolerance based on age and investment time horizon
• Providing engaging, informative portfolio recommendations prior to opening and funding the account
• Displaying extensive details about the recommended portfolio’s projected performance, including volatility, expected outcomes and historical returns (i.e., TDA)
• Providing more details about the portfolio’s composition and fees, including fund-specific asset allocation or an estimated all-in fee that includes the underlying expense ratio (i.e., Fidelity)
• Offering goal progress tracking and projections and providing aggregation-powered portfolio analysis tools
• Offering a distinct experience on the private website, and there are two primary approaches we have see here:
• Building distinct, standalone websites dedicated to their digital advice services (i.e., Schwab, Merrill Edge, TDA)
• Offering distinct digital advice features that are integrated into their full brokerage websites (i.e., Fidelity, Ally Invest, Vanguard and to a lesser degree, ETRADE)

PEK: How are the robo advisor platforms cooperating with new and emerging compliance and regulations for the industry, especially in the pending ‘post-DOL environment’?
ME: There are several ways in which robo advisors are cooperating in the “post-DOL environment”:
• They operate as fiduciaries
• They’re available at a low-cost, so they can pick up any smaller accounts that human FAs are forced to drop in the wake of new regulations
• They are (supposedly) product agnostic; the “pure robos” can honestly make this claim, as they do not offer proprietary funds
• They should make it easy to comply with an audit, as every aspect of the relationship/portfolio management is completely documented due to the digital nature of the service
• It should be relatively easy to update the underlying algorithm to ensure compliance as regulations evolve; it should also be much cheaper to keep a robo service in compliance with new regulations than a traditional advisory business, as you do not have to retrain an entire staff

PEK: With Millennials now at the core of DC Plan populations, how much help are they getting from their employers, who tend to choose their plans for them? Do they understand how much of the retirement burden has shifted to them, and do they appreciate the savings burden this presents?
ME: It’s hard to say how much support Millennials receive from their employers related to their DC plan, because quite frankly, every employer is different and no broad stroke answer exists. Some employers, usually larger ones with dedicated staff for the retirement plan, do a fantastic job of educating Millennials on the DC plan and how saving for retirement fits into the grand scheme of their overall financial well-being. However, other employers simply do not have the resources to provide this level of support, placing an even greater emphasis on the individual to educate themselves on the topic.

Ideally, all employers would be able to offer the level of support required to educate all employees, not just Millennials, on the importance of saving for retirement, the steps to take to achieve their savings goals, and how to measure their current levels of retirement readiness. However, for the thousands of companies that do not have the resources to accomplish this, it is even more imperative for them to implement auto features into their plan to help take some of the burden off of the shoulders of the employees. Studies show that auto-enrolling employees at a rate great enough to take full advantage of the employer match, placing them into a cost-effective QDIA with appropriate asset allocations, and having an auto-escalation feature in place can greatly increase the chances that even the most disengaged employees can achieve their retirement savings goals.

PEK: What role does today’s consumer debt, especially student-loans, play in the retirement savings equation? What other factors impeded their ability to plan for retirement income?
ME: Today’s consumer debt, especially student-loans, certainly creates headwinds for retirement savings. With less disposable income, people are less likely to put money towards their retirement savings. While many employers offer matching programs, a lot of employees only contribute enough to take full advantage of the employer match while they are paying off their student loans and other debts. This leaves a lot of money on the table and has a dramatic effect over time.
In addition to not saving enough, young people run the risk of not starting to save soon enough. Even starting when you’re 30 as opposed to 25 can reduce your savings significantly by the time you’re 65. Luckily, more and more employers are adding auto-enrollment policies to their retirement plans to help mitigate this problem. ◊