Banks are traditionally stodgy institutions built on creaky, old infrastructure and usually being the last ones to adopt new technologies. This has been true regarding robo-advisors and digital advice platforms, where broker-dealers and RIA's have taken the lead over the past few years.
But now, it seems that change is coming.
While the growth of B2C robo-advisors have been plateauing, banks are rolling out robo-advisor platforms at a quickening pace. Global behemoths like Morgan Stanley, Deutsche Bank, and Wells Fargo have all announced digital advice products this year as have regional players such as Citizens Bank.
One of the drivers pushing banks toward digital advice is the ability to support small accounts at scale, which will allow them to reach out to customers before they have enough assets to meet full-service advice minimums. This was mentioned in Morgan Stanley's announcement:
“We want to attract clients earlier in the process, and then graduate them to the appropriate services as their needs become more complex,” says Naureen Hassan, chief digital officer of Morgan Stanley Wealth Management.
Earlier this year, Citizens Bank, with headquarters in Providence, RI, launched a digital advice solution through an agreement with wealth management technology and service provider, SigFig. The digital investment services will integrate with Citizens’ online banking platform and complement the offerings from their own financial consultants.
Citizens, with $147 billion in assets, is well ahead of many smaller banks with respect to adoption of the new technology. Besides digital advice, they have also launched digital lending for small businesses and peer-to-peer payments.
Banks are more forward thinking about digital in general (i.e. online bill payment, mobile, etc.) according to Randy Bullard, General Manager, Wealth Management at SigFig. This sets them apart from old line, full-service advisory firms who are not innovative when it comes to digital advice, since they do not want to risk angering their advisors, he stressed.
We can soon expect a wave of digital offerings from banks, according to Gavin Spitzner, Principal, Wealth Consulting Partners. He predicts that many mid-size regional and super-regional banks will introduce digital offerings over the next 12-18 months.
There will be a difference in profitability between large banks that leverage their own call centers and other infrastructure versus smaller banks, like Citizens, that have to sign co-marketing deals and outsource everything, Spitzner warned. A wirehouse's proprietary solution will offer higher margins than Citizen's revenue-share agreement with SigFig, he proposed. (See Is the Robo Market Finally Consolidating?)
Moving Beyond Just Digital Technology
Many digital advice vendors have been expanding their product set beyond pure technology and into investment management, similar to the offerings of turnkey asset management platforms (TAMP's). SigFig has taken this track and built out a call center that their clients a dedicated team of phone-based advisors, explained their General Manager, Dan Mercurio.
This is a viable option for smaller banks that don’t want to spin up their own internal organization, Mercurio noted, since they can scale up or down depending on business needs. SigFig hired hired staff who had traditional retail banking experience for their Phoenix-based call center, he stated.
This experience provides SigFig with a competitive advantage since it enables them to identify bank product needs such as home equity loans, CDs, etc. They have designed a process for transferring warm referrals back to the bank, which facilitates product cross-selling, Mercurio added.
While Mercurio was mum on the specifics of the Citizens' deal, he did explain two of the pricing models SigFig offers. One is where they "bake in" some basis points of variable revenue share and one where the partner pays a fixed, fully-loaded cost for their service.
Many wealth management technology and product vendors do not understand banks, even though they provide their platforms and services to banks' wealth management arms. This is especially true for banks that have significant retail business, who are sometimes looked down upon for their mass and emerging affluent customer base when compared to HNW advisors at private banks, wirehouses and RIAs.
An interesting comparison was raised by SigFig's Bullard when he pointed out that while retail banking services are bought, wealth management services are always sold.
In other words, customer awareness of retail banking products is high, so customers are much more likely to go to their local branch and ask for a specific product. This is the opposite for wealth management products and services, much of which is opaque and confusing and must therefore be sold to investors by financial advisors, Bullard noted. (See Acorns vs. Stash: Why Micro-Savings Apps Are The Wave of the Future)
Banks also have the advantage of large cross-selling opportunities between their retail and wealth management arms. It is a lot less of a leap for a bank to engage a retail client in a digital advice dialogue as opposed to a full-service advisor trying to have a discussion about retail banking products, Bullard observed.
As reported in Barron's, Wells Fargo's retail bank has 72 million customers, which presents tremendous cross-selling opportunities for the wealth-management business. Wells also has around 20 million Millennial and Generation X retail clients who don’t yet have investment accounts at the bank.
Wells averages about $1 billion in referrals a month from its banking arm into its investment arm, a figure it expects to grow with the launch of Intuitive Investor.
Wealth management technology vendors of all sizes are looking towards the banking sector as a new source of clients both for digital advice and traditional advice software. Large end-to-end platform providers such as Vestmark, Envestnet and Fiserv have all built out their own robo offerings or integrated with external partners.
Rob Klapprodt, President of Vestmark, a provider of unified wealth management technology and advisory services commented that, "For many banks, particularly smaller banks that haven’t offered wealth management services to-date, digital advice represents a way to step into the advisory space utilizing a range of outsourcing options from complete turnkey wealth management to just tapping technology providers to drive the experience – and everything in between."
Another advantage that banks have over full-service advisory firms is customer loyalty. Banks have known for decades that increasing customer loyalty is the way to increase growth but they also are aware that it's not easy. They have experienced the shift to digital and seen their loyalty scores shoot up when they offer exceptional online and mobile experiences.
A recent report by consulting firm Bain & Company found that greater loyalty improved the odds of cross-selling. Consumers who are promoters of their primary banks were far more likely than detractors to buy the next product from that bank.
The secret sauce for banks appears to be their already higher loyalty scores, proposed Simon Algar, Principal at consulting firm Wealth-Reports. But he noted that it's a double edged sword because clients increasingly EXPECT similar digital experiences across banks' very rich product shelf including transactional / deposits and relationship / investments and credit businesses. A client relationship that is nurturing, proactive and provides personal end-to-end financial education, mixed with good advice and executed well is the banking Holy Grail, Algar asserted.
While it's true that high-touch areas like private banking could be undermined by a self-directed channel, the opportunity to capture wealth management assets is a bonus for any bank, Bullard insisted. If a client walks into a retail branch with $180K of investible assets, and the bank can tap into that and everyone wins since no advisor lost on that deal. (See How the Robo Advisor Renaissance Pushed the Industry Out of the Dark Ages)
Banks may be in the middle of a digital advice window of opportunity. 68% of financial professionals recently surveyed by Aite Group believe reaching new and untapped investor segments will be a key factor in driving growth, with 62% saying a digital advisory platform would help them acquire those younger clients.
Yet, only 5% are either using a digital advisor platform or planning to launch one, the survey found.
The way vendors were thinking about digital advice technology and services has evolved over the past 12-18 months, explained SigFig's Mercurio. There was a perception that by turning on digital advice at a bank, it would automatically start capturing a new set of younger clients. However, what SigFig's research has found is that age is not a good indicator of probability to adopt digital advice, he explained.
After normalizing for online banking, across the population of customers with online login credentials and compare the age of those that converted to digital advice versus those that did not convert, there was no difference in age.
The leading indicator of the likelihood to convert to digital advice was the number of bank products and services the customers was already using, Mercurio reported. The more engaged a customer is with their bank, the more likely they will purchase another solution, he stressed.
This increased level engagement will be critical since banks bumping up against competitors in the digital advice space such as Vanguard, Schwab and Betterment.
"Banks have a unique opportunity to integrate a digital offering with their retail online banking client experience," Spitzner stated. "While they may never invest the marketing the dollars it would take to generate significant organic growth, they can retain bank clients — both retail and wealth management — who otherwise may [leave]."
Bank Customers Shifting to Digital Advice
Digital advice will soon playing a major role within banks’ holistic wealth management solutions, proposed Tirdad Shojaie, SVP, Product Strategy, Fiserv Investment Solutions. This prediction is based on recent surveys of US bank customers that report around 10 million households, representing 10% of HNW and 25% of mass affluent, are likely to prefer digital advice over traditional advisor relationships.
Banks need to provide differentiated digital offerings to a variety of customer segments because these revenue streams are uncorrelated to their deposit business, which is closely tied to interest rates, Shojaie pointed out.
Private bank and trust departments have been suffering high attrition rates on the nearly $4 trillion in managed assets they control, Shojaie observed, due to beneficiaries transferring assets out. A digital advice solution combining low-cost investment management, financial planning and personal financial management (PFM) capabilities could serve as a retention platform as boomer-driven wealth transfers accelerate, he stated.
Banks generally see digital advice as a value-add rather than a disrupter, Klapprodt suggested. This is especially true if they don’t currently provide wealth management services. Banks lived through the digitization of their traditional deposit business and have seen this before, he noted.
Bullard predicted that the number of full service financial advisors will be cut in half over the next 20 years. The ones who are left will only be serving high minimum clients of over $1 million. The smaller clients will go into the digital bucket, where the advisor gets a minimum payment, but never touches them, since they are serviced online or via the call center.
Hybrid Advice is Winning
With runaway success of Vanguard's Personal Advisor Services hybrid robo, the rest of the robo-advisors have been swept along in their wake with Betterment and others launching their own hybrid solutions. Of course, firms like Personal Capital have been hybrid from the start.
One of the ways that robo-advisors scale their business is by offering cookie cutter solutions that fit a wide range of client profiles. This is usually the opposite of how most wealth management firms operate since an advisor's ability to design customized solutions for each client is part of their value added.
Since digital solutions are much cheaper than human advisors, full-service wealth management firms must navigate around it to avoid undermining their advisors' value proposition, Bullard warned.
Other robo-platform providers are helping banks to maintain their traditional human-centric value prop. Jemstep enables this by offering a digital advice platform with an open investment architecture allowing banks to implement their own investment strategies, explained their president and CEO, Simon Roy.
Providing support for brokerage accounts as well as advisory is one way Jemstep facilitates advisor adoption of digital advice at their own pace, Roy insisted.
Robo Advisors in Banking
When you take into account all of the trends in motion across the industry including fee-compression, active vs passive, increasing digital consumption of all things you eventually reach a convergence point which is positive for banks and negative for full service advice. Full service advice will not be going away any time soon, but with the average fee goes from 250 bps a decade ago to less than 50 bps now, it has to come out of someone’s pocket, and it will eventually be a huge hit for advisors.
Digital advice could be the electronic savior of advisors or the last nail in their collective coffins.