by Mike Harding
High Net Worth (HNW) individuals and families have personal financial advisors who take a holistic view of their financial situation, liabilities, and future plans—and then dispense investment advice, recommend a range of strategies, and manage the portfolio.
However, for the Affluent—those above the mass retail market but below the HNW—this gold-standard service is not available. From the provider’s perspective, the economics of managing relationships and money are often poor, in large part due to the high cost of onboarding and the discovery (of income, outgo, liabilities, and future dreams) required to deliver holistic advice. And, because providers ration access to their advisors to manage cost and profitability, the service often disappoints.
The first wave of “robo advisors” started to deliver automated advice, but also struggled to deliver a viable proposition. Because of the difficulty of discovery, they gave a very limited form of advice (helping a potential client understand his/her investment-risk appetite) and then offered a simple range of products reflecting this level of risk—but ignored everything else about that client’s financial life.
This level of ‘advice’ was not compelling. As a result, startup robo advisors struggled to capture customers, build revenue, and scale. Only brand-name providers with existing scale have been able to break through this barrier. However, even they have fallen short of delivering holistic advice.
Starting in the last year or so, “Robo 2.0” represents a quantum leap forward, taking advantage of enablers such as open-data environments, open APIs, better algorithms, regulatory pressures, and customers who are more comfortable engaging through self-directed web options. Regulatory initiatives such as Payment Services Directive 2 (PSD2) in Europe will accelerate the shift to permissioned third-party access to customers’ accounts, and presages an ecosystem where third parties are able efficiently build higher-value, investment-advisory propositions.
With client permission, next-generation advisors can aggregate both bank and (importantly) investment accounts, then conduct automated conversations to ask about liabilities and/or future plans—for college, buying a home, a boat, a second home, or retirement. This provides both a client balance sheet and income statement. Together with automated portfolio construction, this helps clients understand the consequences of decisions and the impact of different investment strategies. Add in execution, reporting and monitoring, and you have an automated, end-to-end process that replicates the discretionary portfolio-management service provided to HNW individuals—but available at retail and low cost. In this scenario, individuals with a mere $5,000 or $20,000 to invest will have access to advice that has typically been restricted to those with, say, $5 to $20 million to invest.
A Future of Bionic Advice
Will everyone accept such “robo” advice? For now, no—but the trend in adoption of automated delivery of services is clearly upward, especially among the digitally savvy affluent.
There are three ways in which this automated advisory and investment process can be exploited. First, in pure ‘self-directed’ mode, Robo 2.0 offers a low marginal-cost opportunity to serve younger and lower-income segments just starting to invest. With limited modification, this robo engine can sit behind a human advisor providing services to the HNW. The arithmetic is largely the same, even if the numbers are larger.
Between these two ends of the spectrum is a hybrid model. A human advisor, acting as more of a coach and less of an intermediary in the process, can be combined with a Robo 2.0 system to create a ‘bionic’ solution—a low-cost, automated engine supplemented by the high touch of a human advisor.
We see this hybrid model as the future of advice: Automation of discovery, gamification of the liability-discovery process, and automated execution with on-demand support from human advisor-coaches via chat, video, phone, or face-to-face, as appropriate. The concept started with investment advisory services, but is now expanding to cover others aspects of financial advice, including debt consolidation.
In today’s world of modular financial services, robo advisors have the potential to reduce cost, and improve quality and consistency at all steps of value chain—from planning to execution to feedback. They also have the potential to give incumbents a powerful new offering that expands the relationship with the majority of their customers, and builds toward a ‘lifetime advisor’ concept that delivers holistic advice across a lifespan.