How to Add a Robo Without Cannibalizing Human Advice: Cerulli

Financial advisory firms that rely heavily on human advisors face multiple challenges when trying to add a robo offering without cannibalizing their existing business.

“The disruptive influence of digital pioneers is causing all financial firms to consider how to incorporate automated advice into their investment advisory platform [but] firms that rely heavily on human advisors face the most complicated challenges reconciling automated advice with their delivery model,” according to a new report from Cerulli Associates.

How should these firms brand the offering – as a separate service or one incorporated into their existing advisory service? Who should develop the service – the firm itself or an outside vendor? Or should they outsource the service to a third party?

“Whether traditional managers opt to build their own robo-advice solution, find a fintech partner or leverage on existing applications, clear realistic strategic objectives need to be drawn up before any decisions are taken,” according to Cerulli, a global financial services research firm.

Its survey of executives at managed account firms found that half favor incorporating a robo-advisory service within its “continuum of advised offerings” while nearly one-third (31%) prefer a separately branded service.

Even the biggest financial firms are divided on this question, according to Cerulli. Schwab brands its digital offerings for retail clients separately – Schwab Intelligent Portfolios is its pure digital offering and starting in the first half, Schwab Intelligent Advisory will include access to financial planners – while Vanguard has folded its robo service into its existing business.

“A firm’s choice will depend on service, pricing, and the relationship of the digital product to the advisor,” according to Cerulli. If the robo platform and human advisor are closely linked then “the firm may want to promote the digital offering as just another way to connect with a human,” but if the firm believes robo-advisor clients might not migrate to a human advisor it could create a separate brand for digital advice with its own call center and website, according to Cerulli.

Only 20% of executives surveyed by Cerulli plan to build the additional robo service themselves and just 12% expect to outsource the service completely using private labeling for an existing pre-packaged TAMP offering.  Another 12% plan to outsource only the development and investment methodology to one or more third parties. The most popular choice –  for 36% of executives – was to outsource only the development of technology while using the firm’s own investment methodology.

That choice, involving partnering with such firms such as Jemstep and Envestnet, offers many benefits, according to Cerulli, including providing immediate robo services as well as the expertise to help market a digital advice platform.

Pricing is another challenge for traditional advisory firms looking to add a robo-advisory service. Sixty-two percent of executives at managed account firms favor lower prices for robo-advice services compared to traditional human advisory services and almost half (48%) favor pricing between 25 and 50 basis points, according to the Cerulli survey. That’s equivalent to one-quarter or one-half of the typical 100 basis point pricing for traditional advisory services.

Cerulli analysts, however, note that the pricing should not be as low as the 25 to 35 basis points that most digital startups charge.

“The aggressive pricing of digital advisors places competitive pressure on traditional advisors,” according to Cerulli. “Having the ability to connect with a human advisor – even at a lower frequency than high-paying clients – adds value to the relationship, and the pricing should reflect this value.”

Moreover, according to Cerulli, a sharply lower price for digital advice will make it difficult for firms to “upsell” to more expensive advisory services as clients’ assets grow and their financial lives become more complicated.

Firms that use different pricing strategies for robo advice compared to traditional advice need to make sure the differential is not so great that clients that firms will find it difficult to convince clients to move from one to the other, according to Cerulli. They need to explain the differences between the services and that the added value of a relationship with a human advisor justifies the higher price. “The added value should include robust, goals-based financial planning,” according to Cerulli.

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