Robo Advice Friend or foe to the advisor?
Eugene van Rensburg
Head of Wealth Management SA
March 2016
www.iress.com
Contents
Introduction3
The direct to client market landscape
4
Global digital capability trends5
Digital channels as strategic asset to the advisor
6
Conclusion7
3
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Introduction
Robo-advice is a hotly debated topic, both
with regard to the term itself and what it
represents however the term is broadly used
to describe any automated direct to customer
financial advice or guidance. The term was
first used to describe the on-line, self-led
investment propositions developed by a
number of start-ups in the US, e.g. Market
Riders, Wealthfront, Betterment and others.
These have since been followed by a number
of similar start-ups around the world. More
recently the term has also been applied to
applications that seek to advise, or guide,
consumers through the process of selecting
packaged retail investment, savings and
protection products, i.e. to enable consumers
to address specific rather than holistic needs.
The emergence of robo-advice has been met with
some concern from advisors around the world
who view it as inappropriate depersonalisation of
the core value of personal advice which, it has
been speculated, could ultimately lead to the
disintermediation of face-to-face business models.
Others believe that it offers an opportunity for advisers
to better engage with clients and to make their
businesses more efficient.
There has also been talk of robo-advice or digital
advice enabling the provision of advice to massmarket segments, typically uneconomical to cater
for with traditional face to face advice provision. I
believe this is likely to have wide market appeal. Many
mass-market, financially naïve consumers will be
attracted by the educational aspects and simplicity
of these services enabling them to move at their own
pace at a price they can afford. Similarly, some highly
experienced investors will be attracted by the lower
costs, automated rebalancing and higher levels of
on-line access that robo-advice services typically
offer. Over time technology and digital channels will
be used to deliver an expanding range of services to
an increasing variety of consumer segments and, as
such, the appeal of ‘robo-advice’ is expected to grow.
So how has this progressed to date and how can
advisors best take advantage of this?
Eugene van Renburg
Head of Wealth Management SA
IRESS
4
The direct to client market landscape
Due to the relative infancy of the direct to
client digital landscape, and its start-up
origins, the US is used as a barometer of
the success of robo-advisors in attracting
assets under management. Investment News
reported in January 2016 that the assets
under management for robo-advisors in the
US, as reported by the US Securities and
Exchange Commission, grew by 209% year
on year from January 2015 to January 2016
whilst hybrid robo-models, typically deployed
by large existing investment providers, grew
their assets under management over the
same period by 53.76% year on year.
This report declared the robo-advice assets under
management for the new digital platforms to be
$11,743bn in January 2016 whilst for hybrid roboadvisors it was $136,944bn. Whilst these are material
nominal assets under management it is important
to note that this represents less than 0.25% of the
Private Financial Wealth in North America and 0.5%
of the total Assets Under Management , as reported
by Boston Consulting Group in their Global Asset
Management and Global Wealth Reports of 2015.
This indicates that robo-advice is serving a need in
the market that has previously been neglected, albeit
for a small segment of the overall investment market.
Assets under management
by robo-advisors grew
209% year on year.
\
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Global digital capability trends
Financial services advisor and product
businesses are feeling the pressure from
more demanding better informed customers
to adapt and improve the client product and
service experience. These businesses are also
experiencing a difficult economic environment
forcing them to innovate around operational
efficiency and sales effectiveness.
From this research the priorities were ranked as
follows:
The Boston Consulting Group, in their Wealth
Manager Performance Benchmark Report of
2015, highlighted the top investment priorities in
global financial services provider businesses as
the improvement of sales effectiveness and the
development of digital capabilities. The survey
examined the total investment allocation by wealth
management financial institutions and focused on
the following two specific categories, i) investment to
enhance existing business, and ii) expand into new
frontiers.
•
1st Improve sales force effectiveness – 17%
investment
•
2nd Enhance digital interfaces – 14% investment
•
3rd Develop a digital advisor channel – 10%
investment
•
3rd Improve operating efficiency and cut costs –
10% investment
•
3rd Increase collaboration with other units – 10%
investment
•
6th Acquire competitor assets – 9% investment
•
7th Develop asset management or capital market
capabilities – 8% investment
•
8th Develop new client segments – 6% investment
These priorities show a clear congruence of
investment into a multichannel strategy underpinned
by technology solutions to provide scalability and
efficiency. The overall emergent investment theme
seeks to enhance the overall customer experience
and improve business efficiency whilst enhancing and
supporting human sales channels.
17 %
14%
10%
1st Improve sales
force effectiveness
2nd Enhance
digital effectiveness
3rd Develop a
digital advisor channel
6
Digital channels as strategic
asset to the advisor
Financial institutions wishing to adapt their
business models to take advantage of the new
regulatory and customer environments will need
to strategically employ technology as an integral
component of their advice and overall business
value proposition.
A technology platform needs to incorporate an
integrated suite of client front office applications with
a common infrastructure connected into multiple
backend support systems. This while remaining
logically consistent across these systems and
supporting evolving and changing client value
propositions and compliance requirements. Such a
platform would be required to deliver a single client
view with business processes to enable advice
congruence and unified regulatory compliance in a
multi-channel and multi-platform environment.
The platform needs to enable customers to define
their rules of engagement with financial services
providers and enable moving between the multichannel products and service offering of the financial
institution. The following diagram illustrates the high
level architecture of an integrated scaled omni-channel
customer financial services advice platform supported
by multi-channel institutional capability.
The ideal technology solution is modular and
scalable that supports and enables the distribution
of financial services products whether it is to extend
existing value propositions, or to develop new ones,
to meet the needs of a rapidly evolving market. The
solution should enable a client centric omni-channel
experience built on robust multi-channel product and
service dynamic capabilities of the financial services
business it serves.
Full Service
Holistic
Full
Service
Face2Face
Self Service
Scaled
Advised
Limited
Face2Face
Advice
Guided
Scaled
Automated
Call centre
Direct to
Client
Online
Trading
Internet
Banking
Automated
Advice
Self
Directed
PFM
Advice Technology Platform Architecture
Backend systems and 3rd party integration
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Conclusion
Whilst initially many robo-advice services were
developed by new market entrants taking an
adversarial position in relation to the traditional
face-to-face advice business models, the growing
trend is for these disruptors to align themselves
closer to traditional investment businesses as a
complementary service solution to the traditional
advice businesses.
There has also been a marked trend for traditional
financial services advice businesses to develop
their own digital robo-advice value propositions.
The market adoption has shown that robo-advice
channels serve a dual purpose, this being firstly to
introduce and develop a new underserviced market
segment into investments and savings products and
services, and secondly to enhance the service levels
and expand the range of products and services to
existing clients of traditional advice businesses. The
clients’ relationships with financial services providers
is often complex and varied; Sometimes consumers
are happy to self-serve, sometimes they want help
and sometimes they just want somebody else to do
it all for them. This has resulted in financial services
businesses recognising the need to enhance their
client engagement models in a manner that reflects
the changing needs and capabilities of their clients,
improving the client experience at every interaction
whilst improving their business efficiency to adapt
to these changes. Robo-advice employed in a multichannel capable environment provides an opportunity
to reach a wider audience and to offer a broader
range of products and services that is able to meet
the complex and varying demands of the clients they
serve.
Robo-advice should not be viewed as an adversary
or alternative to traditional advice models, but rather
an opportunity for advisors to grow and scale their
business as part of a multi-advice, multi-channel
proposition.
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