'Super robos' to emerge as digital financial advice evolves

Robo advisors are evolving again, with the ultimate goal of becoming platforms that automatically manage all aspects of a client’s financial life.

Call them super robos, as the model expands from a focus on simple portfolio allocation to providing advice on insurance, employer plans and now debt management.

“It’s basically the same business cycle that happened with traditional banking,” says Grant Easterbrook, co-founder of digital 401(k) provider Dream Forward. “Bank of America, for example, has banking, wealth management, lending and commercial lending. Everybody wants to be the one-stop shop. They want to keep you in their ecosystem and out of someone else’s.”

Take Wealthfront CEO Andy Rachleff, who spoke for the first time publicly about his company’s big bet on software in June. It’s an ambitious plan to evolve from investment and planning advice to serving as a central financial hub where every financial necessity is met.

“Our vision is to deliver a service where you direct deposit your paycheck and we automatically pay your bills, automatically top off the emergency funds and then route money to any investing platforms that meet your goals,” Rachleff said at CB Insights’ Future of Fintech conference. “You will never have to worry about your finances again. Nobody wakes up and says, ‘I want to worry about my finances.’ “

Wealthfront’s robo advice competitor, Betterment (which has already evolved from digital-only advice to providing a hybrid digital platform and an institutional network) says it is also moving toward the same goal.

"We've been building toward this direction through a number of initiatives and setting up the framework to eventually become the primary financial relationship to deliver advice across all areas of your life: investing, cash flow management, debt and more,” says Joe Ziemer, Betterment’s vice president of communications.

“Looking at the landscape, it’s no secret there are a number of firms with this ambition."

Other automated advice providers — like the micro investing app Acorns — have already rolled out a laundry list of new financial products to grab more market share and further monetize existing clients. Acorns Spend offers a debit card made of tungsten, with an attached checking account. More than 100,000 have been preordered, according to the firm. The firm’s retirement account, called Acorns Later, built up 170,000 accounts in just 2 months, says CEO Noah Kerner.

“What we’re trying to build is a financial wellness system where every American can save and invest,” Kerner said at SourceMedia’s In|Vest conference in July. “We launched the first debit and checking account that automatically saves and invests for you.”

The savings app Qapital is also rebundling banking services with checking accounts and debit cards backed by big names like Lincoln Savings Bank and Wells Fargo, and plans to launch a robo advisor sometime this year.

“These startups have to keep the valuation train running and the easiest and quickest way to do that is to further monetize your own client base,” Easterbrook says.

Financial partnerships are flourishing, too. Some firms are even forging new relationships among competitors. For example, Fifth Third Bancorp's securities unit teamed up with Fidelity recently to offer automated advice.

The larger banks are already trying to capitalize on their native client bases. Wells Fargo launched a hybrid robo adviser last November; while Morgan Stanley launched its automated platform in December. Online-only banks, like Ally Bank, have also supplemented their offerings with automated investing.

“Tech is always going to ask, what else?” says Graham Thomas, head of sales for the fintech firm Genivity. “Tech is copyable; it can be mimicked. The incumbents will copy what they can and buy what they can’t. Unless, there’s a real moat — like a proprietary science behind it — that technology is going to be replicated the very next day.”

But, with vaster amounts of client data, large institutions will likely have more complex compliance and regulatory scrutiny, which could deter them from offering a robust set of robo advice offerings.

“Incumbents are in an interesting position,” says Bill Winterberg, founder of the consulting firm FPPad. “They control access to lots of customer data, but they’re incentivized to sell products to customers — not be a fiduciary to them. So why build a super robo that renders advice, which might trigger regulatory requirements to register under the jurisdiction of the SEC?”

So what does a one-stop shop actually look like?

“A super robo would expand far beyond investments to include cash flow forecasts, loan and debt management, insurance coverage, investment allocation, college planning, estate planning, etcetera, largely replicating the services of a comprehensive financial planner,” Winterberg says.

If a super robo will be able to handle everything a financial planner can, it will have the added efficiencies and conveniences that technologies like AI and advanced algorithms provide, Easterbrook says.

“The hypothetical super robo won’t be the first firm to have had everything under one roof,” Easterbrook says. “The difference is that these fintech firms are tying everything together with technology from the start. These firms have tech in their DNA.”

A lot of the larger institutions are so clunky with different verticals and silos that it becomes difficult to provide a truly seamless, integrated experience in one stack, he says. That’s a huge competitive advantage for the newcomers. “A newly created fintech looking at technology as a starting point makes it a whole lot easier to manage.”

But, as more and more products are bundled together, problems will arise. One of the larger hurdles for a fintech company looking to expand their capabilities is determining what can be built in house and what should be provided by third parties, he says.

“They’ll have to walk a fine line between what brings in the most value and stickiness, but with the least cost and capital outflow,” Easterbrook says. “If you get it wrong, your ship is sunk.”

Operations aside, firms need to have the ability and the risk tolerance to drop capital into new markets and the wherewithal to pull it off successfully. “Is corporate leadership willing and intuitive enough to keep their head on a swivel not just in their competitive markets, but in the entire fintech galaxy?” Thomas says. “Are they going to put some skin in the game to see what’s out there?”

Fintech firms will certainly build the technology and have already begun. The real question may be whether or not clients are willing to put their nest egg in a single basket.

“The big firms have been trying to sell everything under the sun for years and people mostly don’t have all of their financial services in one place,” Easterbrook says. “Will that be different if the technology is good enough? Maybe it’s human nature, but if you look around, people prefer multiple institutions.”

Clients may be wary of a single institution having access to all of their financial data. In theory, a firm could use the aggregated data to upsell products or sell it to third parties. “Aggregation is expensive and it requires daily maintenance, and many legacy financial institutions don’t want to offer up customer data to aggregators when the aggregators tell customers to move their money elsewhere,” says Winterberg. “But without aggregation, the fintech startups won’t have enough good data to perform super robo analytics.”

Then, there’s the omnipresent threat of cyber breaches.

“Maybe I’m just paranoid, but I feel safer having multiple relationships with multiple providers,” Thomas says. “I don’t only diversify my investment portfolio. I like to keep my financial service companies diversified too.”

While the race toward robo mastery is on, this business cycle will almost undoubtedly be followed by yet another corporate quest for more clients, larger assets and greater profitability, Thomas says.

“The funny thing about this is that there’s a kid in a basement somewhere working on an app that’s just going to wreck all of it. Then, the cycle starts again.”