Category Archives: Investment

Integrating Human and Machine Advice: Current State and Future Requirements

Several recent articles and pieces of news pertinent to robos and advisors create an interesting mosaic of the current state of human and machine advice:

The image created by these items depicts the struggles in the advisory business to settle on a clear, promising strategy for integrating advice channels.

The Limits of Disruption

When robos appeared on the scene several years ago, they were heralded as the future of wealth management, a democratizing blow for the industry, and a mortal assault on traditional financial advice. Any who have seen the hype machine movie before won’t be surprised that none of those things turned out to be true. In the real world, the biggest “robos” in terms of assets are those of Vanguard and Schwab that operate as hybrids while the “pure play” B2C robos have struggled to accumulate assets and breakeven on customer acquisition costs.

The reason for this discrepancy between reality and hype is simple: Irrational as it may sometimes be, most people want humans involved in their financial planning. A 2016 survey conducted by EMI and Boston Research Technologies showed not only that most want human involvement, but also that those who were more open to algorithm-driven investing didn’t neatly map to pre-conceived demographic categories. The bottom line is that you can’t will customers and prospects into following your vision for a service offering. Moreover, making assumptions about their behavior based on intuition and truism doesn’t create a strong foundation for success.

Changing Perspectives

The truth is that the majority of customers want a hybrid model. Many of the leading wealth managers understand this and have implemented or will implement various forms of hybrid offerings. In fact, as I mentioned earlier, the largest robos are actually those launched by existing wealth managers Vanguard and Schwab.

But any business heading down the hybrid path needs to recognize that their old models of and assumptions about client management and messaging will likely need to change. Specifically:

  • If portfolio management is outsourced to machines, it becomes a commodity and value must be defined in terms of relationships and communication—an idea that has been around for some time but which has not gained universal acceptance because it is hard to execute.
  • If you are advocating for clients to use your automated platform, you need to recognize that you are now responsible for their adoption of and satisfaction with the investment management software. Firms and their advisors need to be ready to assist clients onboard, answer their questions, and help them realize the full value of the software.
  • Pushing the wrong clients towards a robo solution is a lose-lose situation that will cost time and assets. Firms and their advisors need to have ways of identifying where clients are likely to fall on the spectrum of interest in and comfort with automated portfolio management, recognizing that age and net worth will likely not be great proxies.

Notes from InVest 2017: From Fear of Robos to Hybrid Optimization

When you attend a conference that has a particular thematic focus two years in a row, you have the opportunity to observe the progression of the discussion. InVest 2017, following on the inaugural InVest 2016, very much offered this opportunity.

From my perspective, 2016 was about the retirement advice industry coming to terms with digital advice and moving from seeing human and digital advice channels as competitors to seeing them as complementary. By the 2017 conference, the attendees had come to recognize and understand the necessity of a hybrid model and now were focused on how to manage and optimize that hybrid structure. Two discussion panels exemplified the new focus:

The Empire Strikes Back had a panel of senior executives from large financial services companies (Citi, UBS, Bank of America/Merrill Lynch, and JP Morgan). They all talked about the need to start from a place of understanding the business opportunity offered by digital—an improved client experience, increased efficiency, cross-selling—and to use that understanding to shape digital advice strategy. Throughout the session, the panelists repeatedly highlighted both the opportunity and risks that face big advice providers. The opportunity is to leverage technology to enhance and build new relationships; the risk is that existing clients could be turned off. Specific comments from the panelists illustrate these dynamics:

  • “The industry is moving from product distribution to client relationship management and digital is a big part of that new delivery model.” (Venu Krishnamurthy, Head of Citigold, Citipriority, Citi Personal Wealth Management)
  • “We learned that we couldn’t just rely on our industry experience to deliver a strong digital experience; UI matters a lot.” (Richard Steinmeier, Head of Emerging Affluent and The Wealth Advice Center, UBS Wealth Management Americas)
  • “Clients don’t just use us for one thing, so we have to think about digital advice in the context of overall relationship and be aware of how everything fits together.” (Kelli Keough, Global Head of Digital Wealth Management, JPMorgan Chase)
  • “You have to look at decisions about digital implementations on the basis of the value to client relationships.” (Aron Levine, Head of Consumer Banking and Merrill Edge, Bank of America)

In the Hybrid Strategy IRL (“in real life”) session, panelists from the front lines of client advice talked about how the foundation of the hybrid structure has to be the client and that technology should support, not hinder, the necessary and valued human interactions. In their words:

  • “You have to know who your clients are and how the technology will help you manage and deliver value in their eyes.” (Ryan Parker, CEO, Edelman Financial Services)
  • “Technology should be used to help advisors have better conversations, and to help deliver better outcomes. The guiding questions should be: “What can you automate?”, “What can you augment human with?”, “How do you segment?” (Ben Jones, Managing Director – Intermediary Distribution, BMO Global Asset Management)
  • “Don’t make the mistake of falling in love with the technology” because “our product is our experience…the rest is pipes and plumbing.” (Parker)
  • “Always go back to question: how does it help the client experience?” (Paul Duval, President, Genesis Wealth Advisors)
  • “Technology is empowering. [Clients value our ability] to have tough conversations. The more efficiently we can get “housekeeping” done, the more time we have for those conversations.” (Duval)

As this year’s InVest approaches it will be interesting to see the current state of thinking about the hybrid model, and how far down the road of grappling with the strategic and operational challenges that will likely come with implementing the model companies have come.

Advisor Survey Suggests Areas of Opportunity with Gen Y Investors

Recently, Principal Financial Group released results of their study, the Principal Financial Well-Being Index: Advisors, in which they surveyed a variety of advisors across the country about the state of their practices, the industry, and client trends. Among the key takeaways:

  • 22% of the advisors’ clients live beyond their means, 15% don’t save enough and 11% do not start to save early enough in their careers.
  • Over half (52%) of the respondents said that only 25% of their clients start saving early enough to achieve the recommended level of retirement savings.
  • Only 18% of the advisors surveyed target Gen Y clients.

This suggests a very real opportunity for product providers and distributors to help advisors facilitate meaningful relationships with pre-affluent millennials during their most formative years.

Product providers, particularly those in the defined contribution world, should work with plan sponsors to help educate employees and encourage saving. Product providers can:

  • Create and distribute educational, client-ready content that sponsors can share with newer employees.
  • Develop tools for sponsors – such as a one-page reference guide, brochure or video – that will assist them in using the client-ready content to start conversations with new employees about their saving options and the benefits of the plan.

Initiatives like these can help providers build long-term trust and brand equity with their clients and their clients’ employees. They will also help the company gets the most out of the plan, which can further enhance brand/product loyalty. Finally, there’s a secondary benefit for product providers: Getting plan participants on the path to financial security means they will be better positioned to consider a broader set of investment and retirement solutions later in life (e.g., life insurance, annuities).

Product distributors relying on large advisor networks should provide tools to help advisors connect with existing clients’ next of kin. Studies show that more than 95% of heirs change advisors after they inherit assets. Distributors should arm advisors with:

  • Educational, client-ready content they can share with their clients as appropriate
  • A one-page guide for advisors on how to use the content effectively

In addition, distributors should be working to educate advisors on the business case for pursuing Gen Y and how reducing that generational turnover. By creating a low-cost, scalable solution that has a low impact on advisors’ time but a high impact for long-term relationship-building, distributors can increase mindshare and build loyalty in the intermediary channel.