Emerging technology such as robo-advisors should not be considered the threat to financial advisory businesses that many fear. In fact, such technology may actually boost the demand for personal advice and should help firms deliver their services in new, innovative ways, argues Boston-based research firm Cerulli Associates in its latest newsletter for the U.S. advisory industry.
Cerulli’s latest research finds that although technology is likely going to transform how advisory services are delivered, it also foresees an ongoing — and possibly increasing — demand for personalized human advice, the newsletter notes.
“Since 2010, there has been a continuous stream of developments in the technology available for investors to monitor and manage their portfolios. However, during this period the self-directed investor segment declined from 45% to 33% across all households,” reports Scott Smith, director at Cerulli, in a statement.
Conversely, the ranks of clients who consult regularly with a financial advisor has increased to 43% from 34%, the firm’s research notes. Indeed, Cerulli’s newsletter argues that electronic advice models won’t be able to replace live advisors for most investors.
“Trust in their advisor, and the quality of service, relationship, and advice all trump performance in the eyes of the investor market,” the newsletter says. “Turning over [your] life savings to a provider or advisor requires a level of ultimate trust that a purely electronic interface cannot replace for the bulk of the investor market.”
Cerulli points out that technological innovations in other sectors, such as the WebMD online service and Fitbit activity trackers, were initially seen as threats to demand for medical and fitness professionals. However, these technologies have actually resulted in “more informed consumers interested in receiving expert advice to address the unique challenges they face,” the newsletter notes.
“Most households just do not have the fundamental understanding of financial topics that would allow them to feel comfortable making decisions solely by themselves,” Cerulli’s newsletter says. Instead, the firm suggests that “the increase in the availability of tools to help these investors explore their options will drive demand for personalized advice as investors gain a greater understanding of the vast number of inputs affecting their long-term outcomes.”
Although Cerulli’s newsletter suggests that it’s expected that purely electronic service models will attract market share, these clients will come from those already predisposed to handling their own finances, not from households that were in the advice market in the first place.
“We believe that unique elements of financial advice relationships will prove resistant to being cast aside in favour of purely self-service electronic relationships,” Smith says. “Data can help marketers understand what investors think and want relative to their finances, but wealth managers need to complement this insight with human interaction, predictive analytics and communication.”
The most important impact of technology on the wealth-management industry will be improved communication between advisors and clients, Cerulli’s newsletter suggests. In addition, the ways that firms integrate these technologies into their services and deploy them in different market segments will ultimately distinguish the winners from the losers in this area.
“By balancing technology and human capabilities, firms can more precisely align their capabilities with the actual needs and desires of investor households. The true challenge is identifying which market segments are most addressable for each provider and breaking through the clutter to consistently reach targeted households,” Cerulli’s newsletter notes.
“While some providers will capitalize on the benefits of scale to address the entire market, Cerulli believes that those which more nimbly address niche markets will add the most market share during the next several years,” the newsletter says. “Combining the scalability of technology solutions with the personalization of traditional advisor relationships will enable wealth managers to increase their market position.”