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The Future of Digital Financial Advice: Who Will Succeed?

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For a long time, a key question raised about the financial advisory firms focused on when they would add a digital advice service. Now that so many firms have done so, the focus is on the future of digital wealth management, which includes legacy firms; the outside firms they partner with for digital offerings, like SigFig; and stand-alone robo-advisors like Betterment.

Two industry panels in New York attempted to answer that question this week: one at the Securities Industry and Financial Markets Association’s FinTech conference and another co-sponsored by Broadridge, a global fintech firm, and Aite Group, a global research firm for the financial services industry.

A Growing Industry

Both panels discussed the growing digital advice market, which is projected to grow to $160 billion by the end of this year and $400 billion by year-end 2018 from $65 billion in the first half of 2016, according to a new report released at the Broadridge/Aite conference Wednesday.

The industry is “just getting started,” said Mike Sha, co-founder and CEO of SigFig at the Broadridge breakfast. “We’re three to four years in and have 20 to go.”

He expects the growth of digital advice will coincide with the changing demographic trends of baby boomers retiring — it’s estimated that 10,000 retire every day — and millennials saving for their own retirement as they earn more money and inherit assets from their parents. Those changes “will create an unprecedented need for financial advice,” said Sha.

The current digital advice market now includes a multitude of firms of various types. There are the independent robo-advisors like Betterment and Wealthfront, big banks and brokerages like Wells Fargo and Merrill Lynch, mutual fund companies like Vanguard and Fidelity and tech-focused firms like SigFig that partner with bigger banks like UBS and Wells Fargo.

The offerings range from all-digital service to hybrid offerings that include both digital and human advice, and the lines are blurring. Even Betterment, which started as a direct-to-consumer digital-only service now offers, for an additional fee, services with a human advisor component.

Who Will Succeed?

The key to success in the digital advice market lies with customer service, according to panelists at both New York meetings this week.

“It starts with the client,” said Mike Sha, co-founder and CEO of SigFig. “There’s been a lot of focus on driving alpha, beating the markets [but] fee efficiency is better at driving long-term returns and improving client outcomes. We control not the investment returns through alpha, but how we serve clients.”

And clients will expect to set their own preferences for digital advice like they do for the music they listen to on digital platforms like Spotify, said Steve Scruton, president of Broadridge Advisor Solutions. “People are conditioned to have what they want.”

Data collection and predictive analysis will help digital advisors learn what clients needs and desire, said Scruton. Advisors can then use that information to anticipate when a client wants to talk with the advisor, said Ed O’Brien, CEO of eMoney, who spoke at the Broadridge breakfast.

The challenge for digital advisors is keeping clients engaged over time after the initial online enrollment, said Matthew Ciesinski, senior manager for Personal Advisor Services at Vanguard, its hybrid advisor-robo service, who sat on a panel at the SIFMA FinTech conference. “It’s a huge opportunity for the industry to get all of clients’ data in one place … but how do you demonstrate the lifetime value to a consumer in a robo program?”

One way to do that is to introduce the digital model to the next generation in a client’s family, said O’Brien “Have the family in discussion on the same digital platform.” Not only can that improve current client service to that family, it can help advisors retain that relationship with future generations.

O’Brien anticipates that as a result of the proliferation of digital advice, the financial advisor’s role will evolve more into one of a life coach, who advises on a plethora of issues affecting a client’s financial life, well beyond just investments.

“Those firms that leverage digital advice to attract the next generation of clients, segment their existing client base by behavior or profitability, and ultimately, bring a high-end wealth management brand to the mass-affluent marketplace are the ones that will ultimately harness the competitive advantages of these innovative platforms,” said Alois Pirker, Research Director of Aite Group’s Wealth Management.

Ciesinski of Vanguard says that the most successful digital advice platforms will be low cost, include human contact to deal with complex situations and address changing demographics like the growing retirement of baby boomers. Contrary to conventional wisdom, Ciesinski said, clients 50 and older account for 80% of the users of Vanguard’s Personal Advisor Services, which is the largest robo-advisor in the U.S.

Distribution will be key for robos, added Ciesinski, who recounted a growing list of partnerships of big financial institutions with robos, including BlackRock/FutureAdvisor, Northwestern Mutual/LearnVest and the many partners of SigFig’s (they include UBS and Wells Fargo, among others).

The Future Evolution of Digital Advice

Benjamin Alden, general counsel at Betterment, told the audience listening to the SIFMA panel that said he expects continuing innovation among robo-advisors, including applications that use machine learning and artificial intelligence, but he noted that both require lots of data, which will be a challenge for any startup robos today. Still, he expects to see “a lot more robos until you can say America is oversaving.”

“People always want to talk about the next best thing and now that’s AI and machine learning but first you need to get the basics right,” said Sha of SigFig. “Let’s not talk about five to 10 years down the road until we get the low-hanging fruit solved.”

He suggested that the focus on technology could be a barrier to business because the current tech is not that good at understanding human behavior and shaping it.

Looking out to 30 years, Alden said the robo-advisory business could be more like self-driving cars where humans still play a role but one much more specialized. “If we can do it for cars, how can we not do that with financial advice, which is easier?”

But self-driving cars, though safer for most drivers, won’t produce a Formula One champion. Similarly, digital advice will deliver better service than some advisors but “high-touch” clients will want more.

Financial firms and technology companies serving the industry may not be the only forces in the evolution of the robo-advisory business.

There’s also potential competition from outside the industry.

“Imagine Amazon and Google in deals to sell insurance,” said Victor Gaxiola, head of customer advocacy at Hearsay Systems, who sat on the panel at the SIFMA conference.

That isn’t so farfetched. The biggest money market fund in the world is currently Yu’e Bao, managed by an affiliate of Alibaba. It has about $166 billion in assets from over 300 million investors, just slightly less than the population of the U.S., and has grown so big in four years that China’s central bank is reportedly urging Alibaba to reduce the maximum amount that individuals can invest in the fund, according to Bloomberg.

Perhaps the future of robo-advisors lies elsewhere, outside developed markets, but, said Alden, “We’re not ready to think through our assumptions at this point.”

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