Ignoring the robo trend? Here's what you're in danger of missing
November 30, 2016 10:38 AM
Why watch the digital wealth management industry?
For starters, the sector is a petri dish for the future of advice — and not just regarding the development of advice technologies.
New research from Corporate Insight and other industry consulting firms demonstrate three trends arising from the digital space: more competition, creativity in gaining assets and a changing client.
There is great pressure to launch new platforms. Although digital wealth management represents roughly 1% of the industry's overall investment assets, its growth is in triple digits.
Millions of dollars have already been invested in the sector as a result: In building partnerships, placing equity investments, raising venture capital, advertising budgets or platform development. That will only expand.
Competition will only make it even more difficult for firms to add scale, forcing them to get more creative in how they approach, attract and educate clients. For some, that means redefining the concept of who the wealth management client is — or adding an entirely new segment of client that was historically ignored.
It's a shift that parallels a demographic change in the actual advice client, a trend that is showing up first among digital advice providers. -Suleman Din
For starters, the sector is a petri dish for the future of advice — and not just regarding the development of advice technologies.
New research from Corporate Insight and other industry consulting firms demonstrate three trends arising from the digital space: more competition, creativity in gaining assets and a changing client.
There is great pressure to launch new platforms. Although digital wealth management represents roughly 1% of the industry's overall investment assets, its growth is in triple digits.
Millions of dollars have already been invested in the sector as a result: In building partnerships, placing equity investments, raising venture capital, advertising budgets or platform development. That will only expand.
Competition will only make it even more difficult for firms to add scale, forcing them to get more creative in how they approach, attract and educate clients. For some, that means redefining the concept of who the wealth management client is — or adding an entirely new segment of client that was historically ignored.
It's a shift that parallels a demographic change in the actual advice client, a trend that is showing up first among digital advice providers. -Suleman Din
Huge growth, driven by big names
Digital advice providers now account for at least $67.5 billion in assets. However, Corporate Insight researchers note neither Vanguard nor Schwab's digital offerings were part of their tally when they started. Had they been included, digital advice AUM still grew 110% between July 2015 and August 2016, Corporate Insight reports.
Online managed accounts are winning
The algorithm-only investment advice model is losing ground to online managed accounts, according to Corporate Insight. While the growth rate of paid investment advice has declined, research shows assets under discretionary control have experienced a 208% growth rate in the same period.
The digital advice arena is for gladiators only
Wealthfront CEO Adam Nash suddenly stepped down in October. The surprise news sparked debate among industry observers about the sustainability of the standalone, retail-focused digital advice model. Even Betterment CEO Jon Stein, head of the leading independent robo adviser, acknowledges the current number of robo advice providers is unsustainable.
Asset managers will continue their digital transition
From loud skeptic to generous patron, the asset management's industry's position on robos has switched dramatically. Not only have firms realized they can use digital platforms for product distribution, some like BlackRock have found a new line of business providing digital advice technology for other firms.
Akos Stiller/Bloomberg
The winding road to new assets
As the need to scale increases, the definition of client will change too. Corporate Insight researchers say that this will translate into more creative efforts to find assets. A recent example is Betterment's August deal with Uber to offer its services to its contract drivers, a segment far removed from the traditional wealth management client.
Image: Bloomberg News
Image: Bloomberg News
Where are advisers losing relevance?
The future client will be more assertive in determining what they want to interact with human advisers for, and what they can leave to automation. A report by Roubini ThoughtLab notes that "just over one in five investors believes that by 2021, personal investment advisers will not be necessary for portfolio management, and a similar number says that technology will make advisers less important."
It's not just about algorithms
"Interest in and likelihood to adopt robo advisory services are high among mass affluent investors, but that is only part of the story," says Uday Singh, a partner at consulting firm A.T. Kearney. "The new investment services model will be about creating frictionless and emotionally engaging experiences. To stay competitive, investment service providers will need to embrace digital communication as a fundamental principle of how they do business."
Digital allows for greater diversity
Younger, more diverse, more demanding. That's the profile of the investor engaging in digital advice today compared to other investors, according to Corporate Insight. "They assign much more importance to planning tools, educational content and market alerts, news, research and screening tools than other investors," the firm notes.
Older investors are intrigued by digital advice tools
Older investors are assumed to not be interested in or comfortable using digital advice tools. That's changing too, according to a new study by Hearts & Wallets, which notes that older, wealthier clients are beginning to blend online resources with the use of paid financial professionals. It's not a full embrace — most are still concerned about cybersecurity issues, but admit they are intrigued by the concept of digital advice or the savings it offers.
It's about the market
As an RIA with a set number of loyal clients, it's easy to dismiss the need to engage in digital advice. But the largest industry firms are all building it into their future strategy. Is there a lesson to be heeded here?
