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Enter The Robos

An Overview of Digital Advice

By Alex Crisafi

Mr. Crisafi is an analyst with Backend Benchmarking, which publishes The Robo Report™, a free, comprehensive quarterly newsletter reporting on the digital advice industry. The report publishes performance from 65 real accounts held at 35 different digital advice providers. As we continue to expand, our mission remains the same—to bring transparency to the financial services industry. Visit www.backendb.com

When digital investing was first introduced, it was seen as an industry disruptor. Talks of fee compression, the commoditization of professional asset management, and disruption of the investment advice industry ran rampant. In recent years, the market has continued to mature and adoption has spread across major financial institutions. Banks, discount brokers, and other financial institutions have quickly adopted emerging technology, while robo advisory firms have expanded to offer live advisor services that more closely represent their traditional investing counterparts.

The expansion of services offered, product innovation, and sustained economic growth have helped digital advice providers gather assets at impressive rates. Including products launched at both startups and incumbent institutions, we currently estimate assets managed by digital advisors to be in excess of $440 billion, with a majority of these assets flowing in since the start of 2015. Although still a relatively small segment of the wealth management industry, digital advice is now, undeniably, a permanent fixture in financial services and growing rapidly. Growth rates at digital advice providers have consistently outpaced the advice industry as a whole.

Digital investing has succeeded as an entry point into wealth management, allowing clients to graduate to a full-service relationship as they reach appropriate asset levels. Although initially built as a digital-only product, the hybrid approach—linking digital planning tools and access to a human advisor—has become the dominant model. As the industry continues to evolve, there are lessons that traditional advisors can learn from these new offerings to help them maintain their competitive edge. This includes integrating technological features that clients value and implementing other best practices that will help increase practice efficiency and scalability.

A Continuum of Financial Services

Digital advisors have emerged as a popular option for individuals seeking professional and affordable money management. These products are attracting many self-directed clients who have historically been unable to find reasonable professional management at their level of wealth and stage of life. The reality is that many of these clients are in self-directed accounts not by choice, but because they do not have enough assets to gain access to full-service advisors. Many platforms now use their digital products as part of a continuum of financial services, both to serve clients currently and to allow them to graduate to higher levels of service as their needs grow. Their success at attracting self-directed and lower-asset clients means that digital advice platforms are gaining market share by expanding into previously underserved demographics more than taking market share from traditional advisors. That said, as platforms evolve and expand, pricing pressure and competition with traditional advice will continue to increase.

While independent firms like Betterment and Wealthfront have achieved scale, far more assets are held at digital advice products within existing incumbent firms. Banks, discount brokers, and wirehouses have all adopted digital advice products and are finding success at cross-selling and assisting previously underserved segments of their customers. Digital advice products are filling a gap between self-directed products and traditional advisor services.

While a digital advice product is a good fit in a line-up of products at a large discount broker or bank, it may not fit well into small- to midsize firms due to customer acquisition costs. Large established institutions have ample cross-selling opportunities within existing customer bases and can quickly reach the scale required to profitably serve low-margin digital advice customers. Small- to mid-sized advice firms must assess whether there is a realistic customer acquisition plan and the ability to scale efficiently before fully embracing the launch of a digital advice product.

Technology-driven platforms are also scalable, allowing firms to effectively manage small accounts and provide simple financial planning for customers who were previously unprofitable for investment professionals. Platforms like Acorns and Stash are successfully attracting droves of first-time investors, encouraging positive savings and investing habits. Digital investing platforms typically charge a fraction of the cost of full-service advice firms at their most basic level. Ultimately, consumers are benefiting from this competition.

The Hybrid Model: A Winning Approach

the lines have blurred between traditional advisors and robo advisors. Now, most digital advice platforms either include live support or the ability to upgrade to higher service levels with access to live advisors...

While initially offered as a stand-alone investing product, the industry has experienced a convergence with more traditional wealth management. At first, most of these platforms were entirely user-driven. Users would walk through an automated onboarding process, allowing an individual to quickly establish an account, select a model portfolio, and contribute funds. As this process was usually a self-service experience, users did not have options to receive help from advisors. Since then, the lines have blurred between traditional advisors and robo advisors. Now, most digital advice platforms either include live support or the ability to upgrade to higher service levels with access to live advisors. While a few platforms, such as WiseBanyan and Wealthfront, have stuck to the digital-only model, most providers have mixed their digital capabilities with human advisors to provide more personalized relationships with their clients.

When deciding between digital investing products, consumers should determine their financial planning needs and how much live advice they are seeking. It is also important to understand the professional accreditations and quality of planning that company representatives can provide. Some representatives are there solely for technical support to help walk prospective clients through the onboarding process. Often these representatives fall short in their ability to provide customer- or account-specific advice and meaningful planning. The highest quality platforms have licensed professionals, including Certified Financial Planners, representing more comprehensive financial planning services, and are more comparable to a full-service financial advisor relationship. Determining what services an investor is seeking ahead of time will help them select the right digital advice provider for their needs.

Lessons for Advisors

While digital platforms providing access to live advisors was the first industry-wide trend, continuous changes are necessary to attract new customers. Digital advice companies have further evolved from financial advice providers to more comprehensive consumer finance platforms. After putting pressure on wealth management fees, digital platforms have turned to challenge banks in their core businesses. Offerings that include free spending accounts with debit cards combined with high-interest savings vehicles are undeniably attractive. Full-service advisors may feel pressure to defend their value proposition, justify their fees, and make sure they are providing value-add services beyond just investment management.

There are many lessons that traditional advisors can learn from digital advice platforms. As the industry dynamics shift, advisors should put an emphasis on the human aspects of wealth management, including specialized advice, personalization, and strong client relationships. They can also learn from the digital capabilities being offered by robos, including digital communication and increased accessibility to information. Advisors can initiate mass communication strategies, such as blog posts, targeted mass emailing, and relevant content to better engage their clients.

Advisors should also look to integrate client-friendly technology, such as modern client portals, chat features, digital financial planning, account aggregation, as well as digital document vaults. Within the practice, firms can learn to use model management and trading software, digital onboarding tools, and automated processes to help advisors increase scalability and efficiency. Advisors will need to strike a balance between building digital capabilities to increase attractiveness to tech-savvy clients, while also catering to clients who prefer more traditional services. Technology and best practices can be adopted by a traditional advice firm without having to launch a separate robo-advice product. Advisors should consider how they can leverage technology to improve communication, increase efficiency, and deepen relationships.

Overall, digital advice is changing how many individuals interact with their investments and advisors. So far, these products are expanding markets and proving to be a quality solution for those in need. Although the lines are now somewhat blurred as to what constitutes digital advice, a few things are certain. Consumers will be increasingly exposed to these types of products as banks, discount brokers, and other financial institutions launch their own automated investing platforms, and digital wealth management is here to stay. ◊