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Robo advisors push wealth management into 21st century

Algorithm-based advice appeals to mature users as well as younger customers

Technology is both the enabler and the threat in the new world of risk management. Technology is both the enabler and the threat in the new world of risk management.

Wealth management, the hot ticket in recent years for banks looking to boost noninterest income, has joined the ranks of other traditional financial service offerings challenged by tech-driven products and companies. And just as with other disrupted areas, banks face the crucial question: Is this more threat or opportunity?

Accelerated technological development, however, is just one piece of the wealth management puzzle. There also is a huge pending transfer of wealth among the U.S. population from older generations to younger generations, and the much-hyped emergence of the tech-savvy millennial generation. Both developments have potential for new revenue generation—and both, along with tech change, argue for seizing new opportunities to refocus wealth management offerings.

At ground zero, technology is both the enabler and the threat in the new world of wealth management. New tools have emerged, including “robo advisors” (essentially online, automated portfolio management advice), data aggregation, and mobile applications. In combination, these allow banks to provide, cost-effectively, relatively high quality, personalized wealth management to a huge, so-far-underserved population segment, the so-called “mass affluent.” On the other hand, start-up companies, unburdened by ponderous legacy systems, have already stepped nimbly into this space to disintermediate traditional financial service providers. Examples include Wealthfront, Betterment, and TradeKing. There are many others, and based on their success, investment giants Charles Schwab and Vanguard have rolled out versions as well, with several big banks reported to be following.

Revenue play in flux

Banks have what the fintech start-ups don’t: customers, assets already under management, and a bedrock reputation as trusted sources. However, bedrock can crumble, assets can be easily transferred, and customer preferences for service, access (mobile and digital), timeliness, and value continue to shift. These converging technological and social forces, say industry analysts, service providers, and bankers, call for a fundamental change in how banks provide wealth management services.

“You don’t need to be a bank to be in wealth management,” says Chris Nichols, chief strategy officer, CenterState Bank of Florida, a $5 billion-assets bank headquartered in Davenport, Fla. “Wealth management is just marginally profitable, if that, for many banks. It’s ripe to try to figure out how to lower the cost of service and lower the cost of acquisition, while providing better service. It’s a good growth opportunity.”

“The question should be on [every banker’s] mind, if they are going to adopt some of these technologies. When? That’s a complicated issue,” Nichols adds.

Central Bank and Trust, a $300 million-assets bank based in Hutchinson, Kan., provides wealth management services mainly in the traditional way, one-on-one and in person. Still, Earl McVicker, chairman, CEO, and president, recognizes the changing environment.

“We are competing with a whole variety of companies and even individuals that see themselves as wealth managers, when in reality, they are selling a product or a narrow range of products,” McVicker says. “Certainly there are people who would like to be able to purchase stock online or through their mobile phone. Or they would like to set up an account or something like that. That’s what we’re competing with. But . . . our version of wealth management goes much deeper than that. It is relationship driven.” And it’s profitable. Nevertheless, McVicker knows his bank will have to make it easier for customers to open accounts, make transactions, and review accounts online.

Lurking behind it all, say analysts, are the potential short- and long-term returns that wealth management can bring to banks—if they can figure out how to tap into them.

“One of the things that has lit a fire under the financial services industry is that they need to find a way to boost the bottom line,” says Mark Schwanhausser, director, Omnichannel Financial Services, Javelin Strategy and Research.

Community banks like McVicker’s, along with most larger banks, have been in trust and wealth management for a long time. But since 2008 and the onset of rock-bottom interest rates and narrow interest spreads, more banks have jumped in. That dynamic hasn’t changed much in eight years, but technology and demographic shifts have.

Looking down market

Shifts in age and income demographics play a central role in this new wealth management world.

“If you look at Gen X and Gen Y [millennials] together today, they control a little less than 25% of assets under management in the United States. Fifteen years from now, they will control half of the assets in the United States,” says Gauthier Vincent, U.S. wealth management leader for Deloitte Consulting.

Vincent adds: “This new generation of investors who have new preferences for digital and things like that, they are younger. You can’t ignore that.”

William Boland, senior analyst, Aite Group, offers further data: “Millennial assets are going to more than triple. They are about $2 trillion today. They are going to be about $7 trillion by 2018. If you think about the wealth management landscape, there is about $20 trillion in investable assets. [Deloitte puts a higher estimate on the total wealth management market: $32 trillion.] Even over the next three years, if millennials’ share of the pie gets that much larger, this is a huge opportunity.”

Speaking about millennials, Boland says, “A lot of these people today only have $20,000 or $50,000 to invest. Wealth management firms will have to cast a broad net, leveraging digital technology to do that. It’s an opportunity and also a challenge.”

Schwanhausser breaks this cohort down further: “We actually see two generations. There is Gen Y-one, ages 18 to 24. They really are unaware of finances and the like. They need help, but it’s about day-to-day transactions. Then there is Gen Y-two, 25-34. That’s when you see a rapid and critical change. You start to see people laying down financial roots, starting to add financial institutions. The number of accounts and financial products they have rises considerably. People in that range, 25 to 34, are much more interesting [in relation to wealth management services].”

From a banker’s perspective, Nichols points out: “What is different is how you approach [millennials]. They are actually a little more open. They have a lower trust hurdle to get over [than baby boomers]. However, they are more discriminating in terms of issues like transparency, business conduct, and ethics. We will design anything for the millennials because if you design good technology, it will go across generations.”

Tapping mass affluent

“Who are the most profitable client relationships? It’s the mass-affluent clients, defined as clients who have between $100,000 and $500,000 of investable assets. These are the profitable retail banking clients,” DeLoitte’s Vincent says.

Traditionally, wealth management was seen as profitable for providers if clients individually had $1 million or more in investable assets. For mass-affluent people of more relatively modest means, however, the challenge becomes how to provide effective advice, cost effectively.

“When you’re going for younger customers, you’re going to have to deal with the need to start going through life stages: saving for an emergency fund; saving for big goals like cars, houses, or marriages, college; saving for retirement. They are going to have to help a customer understand how to prioritize. Technology is going to be the enabler of that new kind of relationship if it’s going to succeed,” Schwanhausser says.

“Technology is making the experience for the affluent investor more effective, and it’s making the operational infrastructure for the provider more efficient. You will see greater penetration by banks in a more profitable way with the mass affluent,” points out Al Chiaradonna, senior vice-president, SEI.

Rise of the robo

The first of such technologies that everybody mentions is “robo advice.” Steadily improved over several years, these algorithm-based applications have appeal not only to younger generations of investors, but mature users, as well.

“There are robo advisors now that are cutting edge,” says CenterState’s Nichols. “They ask our customers a set of questions, understand what their goals are and their current position, and then create an allocation for them and actually execute that allocation once they approve it.”

 One of the things that that prevents is the inherent biases that wealth managers sometimes have for or against a certain set of products, according to Nichols. “If done right, it becomes a little more transparent. The beauty of some of these robo advisors, they can look at hundreds of different alternatives and create the best solution for a given customer.”

Now, according to Deloitte’s research, out of a total wealth management market of $32 trillion, about $150 billion is under robo-advisor management.

That’s a “drop in the ocean,” says Vincent, but further projections estimate that by 2025, out of a total market of $51 trillion, robo advisors will manage $5 trillion-$7 trillion.

Aggregation’s appeal

Another technology banks are reexamining is data aggregation—much improved from clumsy earlier efforts. Data aggregation is loosely defined as the gathering of information across all of a given customer’s accounts, both inside and outside the bank. This allows a wealth manager to put together a holistic view of where the customer stands financially, and how she may adjust going forward.

“Banks are including [aggregation] tools,” say Aite Group’s Boland, “giving clients the ability to see what their assets are. In doing so,” he adds, “it gives the banks greater opportunity to attract those assets.” It used to be that lines were drawn between various channels and between products—deposits, auto lending, home insurance, says Boland. “Now, there’s a lot of interest in consolidating platforms to ensure that you’re able to capture all the client’s data. It does two different things. It allows banks to have more access to information. It also gives clients one-stop shopping,” says Boland.

Even traditionalists like Central Bank and Trust’s McVicker recognize this: “There is no doubt that a benefit to the customer is to deal with one institution across all of their financial needs.”

But there’s a problem. “There’s a difference between having information available and actually [being able to use] it,” notes Mark Schwanhausser. He says many banks are wary of aggregation for a variety of reasons: cost, effectiveness, not sure what to do with it. “But what you’re seeing is a real awakening to the need of aggregation, and nobody needs aggregation more than banks themselves,” he says.

Mobile—the end all?

As with everything in banking today, mobile can reconfigure the provision of wealth management. “There’s a greater client interest to interact remotely. It’s digital first,” Boland says. But it’s not digital- or mobile-only.

“It’s true the millennials are very mobile. But I like to put it as they are very multichannel,” observes Stephen Bruggers, vice-president financial services and OEM solutions, MicroStrategy, which provides a platform for mobile wealth management. He explains: “Everybody has a mobile device. You want to check the market. You want to do a trade or something like that on the road. You can do that. But if you are back at home and sitting at your desk, you look at your laptop,” he says.

Mobile goes both ways, Bruggers adds. “It’s good for the advisor, too. We see that in any kind of sales-enablement occasion where the mobile device makes a lot of sense. It has a small footprint. You’re on the road, and you can access everything you need, certainly from a wealth management point of view. [It can] help them do financial planning while sitting with a customer with a mobile device.”

That resonates with CenterState’s Nichols. “One of the things that we’re looking at is something as simple as equipping our relationship managers and business developers with iPads.”

Don’t ditch the touch

One size does not fit all, which then leads to combining technology with touch.

“The way we look at it in the wealth management area is to give the customers access to their own information as seamlessly and electronically as possible. But then we provide the hands-on personal service that I think will always set apart a community bank from an online service,” says McVicker.

“The point of building a hybrid model is right on. That’s the next evolution,” says Deloitte’s Vincent. “The key question is how do you create a hybrid solution that is still going to allow you to serve the mass affluent and mass market in a way that is economical for you as a bank? You need to find the right balance.” Vincent believes banks will create a menu by which clients can engage more or less with a person depending on the size of their relationship and the price they pay.

“The robo advisors aren’t going to handle sophisticated timing issues or multi-country investment issues or complicated tax issues. So there’s still a role for the more advanced wealth management advisors. As we provide a [wealth management] solution going forward, it’s going to be both,” says Nichols.

“There is a kind of continuum between completely self-directed investment versus completely advisor-directed investment,” says Bruggers. “The younger generation is more comfortable with the self- or tech-directed approach. The older generation may be still more advisor-directed. You have to be able to create a user experience for all the customers.”

“I don’t believe technology in wealth management is a replacement for human interaction. It’s an augmentation,” says SEI’s Chiaradonna.

What’s the payback?

So how does a bank sort out all of this? There’s a short-term and a long-term way to look at it. Focusing on the mass-affluent segment, Chiaradonna says the mass-affluent person “is going to grow and will have deposit needs, checking needs, mortgage needs, credit needs. They’re also going to have an investment portfolio. Banks want to see that mass-affluent customer grow up to a high net worth or ultra-high net worth customer.”

Others agree: “The long-term play is taking those Gen Ys and building them toward a day when they have assets to invest,” says Schwanhausser. “That’s where I think the robo players . . . have the potential to start now, serving them in a very economical fashion, to build toward something that’s going to come to fruition years down the line.”

And Boland: “Banks need to, ultimately, find a means of serving their existing clients and deploy some of these tools, and at the same time, keep the lights on. On the other hand, it’s a huge opportunity to deepen share of wallet.”

Sense of urgency

The time for holding back and watching how things shape up is gone. Tech-enabled wealth management is moving rapidly.

Schwanhausser notes that at this year’s Finovate spring meeting, of 72 start-up presentations, at least ten were related to investment or wealth management.

Deloitte’s Vincent adds this warning: “Mass-affluent clients tend to get wealth management service somewhere else, and over time, they may gravitate [all their accounts away]. It’s a major risk for a bank. . . . The name of the game for a bank is to keep the assets at the bank and retain all these mass-affluent relationships.”

MicroStrategy’s Bruggers believes banks are focused now to make sure they don’t lose business to fintechs. “They are adapting to the new technologies and delivering solutions.”

On the other hand, Chiaradonna admonishes, “if the banks lose this game, it means they didn’t change fast enough.”

John Ginovsky

John Ginovsky is a contributing editor of Banking Exchange and editor of the publication’s Tech Exchange e-newsletter. For more than two decades he’s written about the commercial banking industry, specializing in its technological side and how it relates to the actual business of banking. In addition to his weekly blogs—"Making Sense of It All"—he contributes fresh, original stories to each Tech Exchange issue based on personal interviews or exclusive contributed pieces. He previously was senior editor for Community Banker magazine (which merged into ABA Banking Journal) and for ABA Banking Journal and was managing editor and staff reporter for ABA’s Bankers News. Email him at [email protected].

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