In a follow-up to a study released in April that found 11 of the oldest online financial startups managed a combined $11.5 billion, Corporate Insight found that in the three months since, those firms have added another $4.2 billion in assets.
Of the $15.7 billion at those firms, $12 billion is receiving paid investment advice, while $3.7 billion is directly managed by the firm.
Grant Easterbrook, an analyst for Corporate Insight and author of the report, suggested several reasons those firms grew 36.5% in three months. Some firms have recently shifted from free to paid services, he wrote.
Furthermore, established firms like Scottrade and TradeKing launching their own automated services lend legitimacy to the model, according to the report.
A preview of the report, “Transcending the Human Touch: Onboarding and Product Strategy for Automated Investment Advice,” outlined the onboarding process to show how automated firms overcome the drawbacks to not having an advisor to guide a prospect through the process.
For example, SigFig users link their brokerage accounts either by entering their usernames and passwords or entering data manually. The process boasts “bank-level security” throughout.
Once users finish aggregating their accounts, they can set their optimal portfolio based on SigFig’s risk questionnaire. SigFig asks users 10 questions and recommends an appropriate allocation, which it compares to the current allocation in their accounts.
SigFig offers a star rating for fees, risk and potential for returns of the two portfolios and takes this opportunity to direct users toward the firm’s managed account service, which charges 0.25% annually after the first six months. Users can choose to move any of their accounts — or any portion of their accounts — to SigFig. Documents are signed electronically.
Easterbrook noted in the report that it’s a mistake to assume all online advice providers use this account aggregation model. “Online services across many industries face the challenge of getting users to complete a transaction or enrollment before they get distracted or lose interest,” he wrote. “Automatic account aggregation can help overcome this by asking individuals for their usernames and passwords to access their financial information online – details that clients likely know off the top of their heads.”
It also reduces the potential for human error, a likely risk considering how tedious data entry is — not to mention the value to the user of being able to avoid manually entering data, even if they don’t make a mistake.
However, security and privacy protection will always be a prime concern in any online transaction. Especially for older clients, “it may seem unwise to provide their financial account login information to a third-party technology company,” according to the report.
That forces aggregators to explain in detail their security measures; thus the promises of “bank-level security” throughout SigFig’s onboarding process, a fallback Easterbrook said offers only a “minimal level of reassurance.”
Another drawback of account aggregation to firms is simply having to deal with a third-party aggregator. Many of the firms in Corporate Insight’s report said the cost per user of an aggregator was high. Furthermore, customer service was inadequate, and the technology didn’t always work well.
The report noted that Morningstar’s recent acquisition of ByAllAccounts could provide a challenge to firms that use account aggregation. Some firms have followed Morningstar’s example and started developing in-house solutions, but that’s a “long and expensive” process, according to the report.
“Firms that develop their own proprietary services usually say they took this approach because they didn’t want to rely on expensive and difficult third-party firms, but also because they want the ability to perform more advanced analysis of the data than is currently possible through Yodlee or CashEdge,” the two most commonly used third-party aggregators, Easterbrook wrote.
Ultimately, if a firm’s primary function is providing automated buy-hold-sell advice, aggregation is “imperative” just to keep up with the amount of data required. Firms that offer diversified portfolios may choose between aggregation or questionnaires, while firms whose goal is to deliver very low cost services will likely forgo account aggregation. “That said,” according to Easterbrook, “aggregation just about always results in a more accurate portfolio and could help ensure the solution does not overexpose clients to certain asset classes.”
As advisors consider robo-advisors’ competitive threat and adopt some of their technologies to serve a wider base of clients, they should view aggregation as “not mandatory,” but “potentially useful.” Corporate Insight suggested aggregation can help tech-enabled advisors who aren’t meeting with some or all of their clients in person by generating leads and encouraging users to consolidate their assets with the advisor.
Even existing relationships could benefit from aggregation tools. “An aggregation-based tool that reviews a total portfolio could give basic feedback (i.e., 'Your portfolio may be too risky. Would you like to discuss this with your advisor?'), with a follow-up link to share the results,” according to the report.
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