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Digital Advice Market Will Reach $83B by Year End: Cerulli

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The digital advice market will top $83 billion by the end of 2016, according to a November report by Cerulli Associates, with growth projected to reach $385 billion in the next five years. The report found assets controlled by investors interested in using those platforms will exceed $3.3 trillion. “This represents 14% of all assets in reasonably addressable wealth tiers, with an additional 17% as available for consideration in the future,” according to Cerulli.

Although the next half decade is a period of “significant growth” for robos, according to the report, there is “tremendous demand and opportunity” for traditional firms that can “enhance their digital offerings, strengthen their breadth of engagement and reinforce the value of personalized advice.”

Cerulli noted that over the past year, it’s become clear that digital advice platforms “are not the fundamental disruption that the traditional financial industry has been concerned about.”

“We believe that it is essential for traditional financial advice providers to view digital advice delivery not as a force that will displace them, but instead as a way to broaden their opportunity to deliver deeper levels of advice to a wider client base,” Scott Smith, director at Cerulli, said in a statement.

For example, the report found that as of the end of 2015, Gen X investors controlled more than $5.7 trillion in total investable assets in nearly 40 million households. That’s a sizable opportunity for firms whose competitors are “almost exclusively” targeting the much larger boomer and millennial generations.

To serve these investors, though, robos and traditional firms with digital advice platforms need to offer more services within the platform. A report released Thursday by Zurich-based research firm MyPrivateBanking (MPB) said robo-advisors are “at a tipping point” as “none of the platforms evaluated have yet developed the robo-advisory model of client recruitment to its full potential, with even the best current players leaving out at least one essential component.”

Although there were “plenty of examples of good practice” at the 30 leading global robos the firm examined, “no providers are yet coming close to offering an end-to-end consistent level of excellence,” according to MPB.

For example, MPB’s researchers found that robo-advisors “provided either good information about the product and process or good knowledge content but rarely both.”

Francis Groves, senior analyst of MyPrivateBanking Research, said in a statement that this tendency to offer some of the features investors need but not all of them “was tolerated by clients at the start of the robo-advisor breakthrough,” but now investors are demanding “top performance throughout the full process, from comprehensively explaining the services to superior portfolio reporting.”

Of the 30 digital platforms examined by the firm, Schwab Intelligent Portfolios scored the highest, for its strength in offering information on the investment product and processes, assessing clients’ situations and delivering a high-quality user experience.

It’s important for well-established firms like Schwab that roll out a digital advice offering do so with the user’s long-term experience in mind. Firms that put out robo offerings that focus on client onboarding without providing education and engagement to encourage relationships risk losing those clients. “We foresee the need for leading institutions to be more radical and wholehearted in their automated investment initiatives in the next few years, even if this means starting over again with a second robo-advisor to replace their first,” according to MPB.

“The pioneer years of robo-advisors have come to the end and the market will separate the wheat from the chaff,” Groves said in the statement. “Too many automated nvestment services target the same, growing — but still not sufficient — client segment to nurture all or most of them. Too few of the automated investment services see their platform through the eyes of a first-time user, while many are losing sight of the need for sustaining a customer experience that will — ideally — last for years.”

Cerulli came to a similar conclusion, finding that the key question for traditional firms is not whether they will offer a digital engagement platform, but how they will use them to connect advisors and clients “in ways that highlight the value of advisory services beyond commodified aspects of portfolio management.”

Investors still value advisors who can help them navigate complex planning issues they face, the report stated, as households “seek advice from a professional who can help them manage the turbulent times by focusing on goals and staying the course versus making panicked decisions that will have a negative impact on a portfolio.” In fact, despite the widespread availability of financial information and planning tools, investors’ use of different advice methods has remained consistent, Cerulli found. “Though investors have access to the resources to manage their own financial affairs, they remain reluctant to take on this burden of responsibility,” according to the report.

Firms need to focus on comprehensive advice, not just portfolio management to meet clients’ expectations. The report found many wirehouse advisors advertise comprehensive advice, but tend to focus on portfolio management and asset gathering. Consequently, those clients had the lowest reported satisfaction levels, according to Cerulli. “An increasing reliance on team-based practices, with staff dedicated to each element of the wealth management process, should help minimize these disconnects moving forward,” according to the report.

— Read Forget Robos; Regulations Now Top Driver of Advisor Tech on ThinkAdvisor’s TechCenter.