- Keith Bossey, SVP Consulting, Financial Services, GfK
- Martin Grimwood, Divisional Director of Financial Services, GfK
BBVA Compass, one of the top 25 largest US commercial banks based on deposit market share, announced in January they are offering BlackRock’s robo-advisory service, FutureAdvisor. The announcement follows a landslide of robo-advisor activity and news in 2015.
Robo-advisors are an investment product or service that provides online portfolio management with little or no human intervention. Instead, the approach is automated with the robo-advisor employing algorithms to construct and adjust portfolios. Each robo-advisor has their own algorithms but they are all based on traditional portfolio theories.
According to a 2015 report by management consultant A.T. Kearney, robo-advisors will manage upwards of US$2 trillion in the US alone by 2020, which would move them from a 0.5% market share of invested assets today, to nearly 6%. The market emerged with players like Betterment, LearnVest and Wealthfront, technology focused upstarts that quickly raised assets under management by offering very low cost asset management services through a non-human, digital interface. Technology enabled them to offer services normally reserved for the highest net worth investors to the masses.
But the success of these services meant that the more traditional players would soon jump in. Furthermore, because these services are built on well-known portfolio management theories, the barrier to entry is incredibly small. For instance, Charles Schwab introduced its Schwab Intelligent Portfolios product in March 2015 and by the end of the year had over $5 billion in assets under management. It took Betterment over five years to break the US$3 billion mark. Over the last 6 months in the US, we’ve seen firm after firm announce that they will build, buy, or partner with someone in order to launch their own robo-advisory service. By the end of 2016, wealth management firms not offering some type of digital advisor service will be rare.
Is all this so new? Perhaps not. The reality is that robo-advice is going down the same path that most financial service products take – commoditization. Digital just makes this happen faster. The fact that robos are growing so fast means that soon, financial services players will be competing on returns and fees – just as they have been before.
Furthermore, just because you CAN do something doesn’t mean you should. Robo-advisors have the opportunity to further de-humanize an already impersonal profession. Do consumers really want to have their money managed by a robot? Recent research conducted by GfK in the US among US bank customers already points to the fact that most people do not feel they have a personal relationship with their primary bank. Only 37% see their primary bank as a trusted partner and only 31% feel that their primary bank knows them well.
The need for differentiation (and possibly the realization that consumers want to deal with humans) has spurred some firms to recently combine robo-advice with a human touch. Vanguard’s Personal Advisor Service added a robo-advice component to its service and has seen dramatic asset inflows. The product allows robo-advised clients to interact with a real human advisor through Apple’s FaceTime. Also, global asset manager INVESCO recently purchased robo-advisor Jemstep and plans to use it to give its human advisors a way to offer digital advice. So it would appear there’s room for the human factor – ‘robo-advisors with a heart’. Perhaps then it’s a case of the 3 ‘R’s – ‘responsive robo relationships’?
In the end, what we may be seeing is not the democratization of wealth management but the further erosion of profits that digital has unleashed on other areas of financial services. For the most part, the robo advisor products of the traditional players are not bringing in net new assets, they are cannibalizing their own products. Furthermore, they are doing this at a lower fee. While the predictions for the rise of robo-advice are probably accurate, their impact on the financial services business may not be positive. Players in the industry are still facing the same brutal competition, but may be doing so at lower and lower fees.
The success of robo advisors has yet to be demonstrated. It’s the speed of adoption that has made news not the results. Robo advice alone is clearly not bringing in new assets and in most cases firms are seeing clients simply shift assets from other products. However, the prediction above of US$2 trillion of assets by 2020 in the US would mean it matches the current level of ETF investment in the US. On that basis, it’s easy to argue that robo advice is indeed going to be successful. At the same time, will that success belong to the firms that best understand how to combine digital and human?
GfK is planning research on this theme of ‘robo advisers with a heart’ and it will be interesting to discover the insights.