Robo-advisors and other digital investment management platforms will increasingly challenge traditional wealth-management providers to adapt to quickly evolving consumer expectations or risk losing the next generation of investors, according to Jesse McWaters, a financial innovation specialist with the World Economic Forum in New York.
“The question, in a sense, that’s asked being asked by robo-advisors is, ‘If you are 28 or 29 years old, you have your first really good job, you’re out of college, do you really need personalized advice?’,” says McWaters, who spoke at the RFi Canadian Payments Forum in Toronto on Tuesday on the subject of the “fintech” disruption facing the financial services sector.
Younger clients, who are accustomed to accessing convenient and low-cost digital solutions in other aspects of their lives, are increasingly giving traditional providers a pass, and turning instead to digital platforms such as robo-advisors and digital peer-to-peer lenders, he said.
“It’s not just about getting a better rate, it’s not just about getting access to credit that you might not have previously had, customers who use the platforms often [say that] fundamental usability is one of the things that drives them to it,” says McWaters.
Traditional wealth-management providers, McWaters acknowledges, have “an enormous head start in terms of scale,” adding that disruptive technology would not necessarily change which names dominate the wealth-management space in the future. Indeed, over the past year or so, several major financial services firms in the U.S. have launched their own robo-advisor platforms.
“The day that [U.S. brokerage firm] Charles Schwab turned on its Intelligent Portfolios robo-advisor [earlier this year], it had US$500 million in assets under management because it rolled over a bunch of clients,” he says.
In Canada, several of the big banks are either planning to launch a robo-advisor platform or are considering doing so. There are currently about 10 independent robo-advisors already operating in this country.
“You have a very, very engaged younger demographic in the 18-24 and 25-34 age ranges starting to move through the market,” says Charles Green, group CEO of RFI Group, an Australia-based financial services research firm. “The challenge for the Canadian banks is to see that coming, to anticipate and engage with them and work out what digital core position is going to be a winning proposition for those customers.”
However, new digital wealth-management providers, in contrast to the established players, have the luxury to enter the competitive market in highly targeted ways without being tied down by capital-intensive legacy operations, McWaters says. They can choose to provide services where customer frustration with existing providers is highest and where the profit margin is the largest.
“Silicon Valley would argue that it has a special mojo for creating experiences that don’t just satisfy consumers, but delight them,” McWaters says. “They understand, in some fundamental way, the needs and the attitudes of the millennial generation.”
The rise of the robo-advisor channel will likely lead traditional providers to sharpen their value proposition in the full-service space while, at the same time, look for ways to broaden their appeal to a mass affluent consumer base, he says.
“Robo-advisors have, in a sense, thrown down the guantlet,” McWaters says. “The role of the physical advisor is to respond by showing where and when that advice is most valuable and where it can command higher fees than just for these basic [asset-allocation] services.”