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Portfolio > Mutual Funds

4 Ways Robo-Advisors Improve Client Onboarding

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A recent report by Corporate Insight examined the client onboarding process at several leading digital advice platforms.

Incumbent firms are driving growth of assets on digital platforms, according to Corporate Insight, but startups have an edge on client acquisition.

“When you see some of the best customer onboarding and acquisition techniques, they’re coming from the startups,” Sean McDermott, project manager on the consulting services team at Corporate Insight, said on a webinar discussing the findings. “These firms, at this point, have been iterating on their earliest products for years now. The incumbents are still new to this.”

(Related: The Future of Digital Financial Advice: Who Will Succeed?)

Still, on an AUM basis, Vanguard’s digital offering dwarfs even fellow incumbent Schwab. As of the third quarter of 2016, Vanguard Personal Advisor Services and Schwab Intelligent Portfolios together accounted for over $51 billion, three times the startups’ assets under management, Corporate Insight found.

“We saw from July 2015 to August 2016 110% growth in AUM in the space, and that was really largely driven by the incumbents,” according to McDermott.  

The results of the report are based on Corporate Insight’s experience opening accounts with major digital platform providers in the first quarter of 2017. The firm opened accounts using a consistent investor persona: a married man in his 40s with annual pre-tax income of $250,000 and $500,000 in investable assets, net worth of $1 million and a moderate risk tolerance.

1. Questionnaires and Approach to Risk Tolerance

One of the most distinctive features of digital advice platforms is the investor questionnaire, the answers to which determine how a user’s portfolio will be allocated. Corporate Insight found the depth of the questionnaires used by the platforms it analyzed varied greatly.

E-Trade, Merrill Edge and Schwab had the most comprehensive questionnaires, with about a dozen questions to determine the best portfolio for a user.

Future Advisor, Personal Capital and Betterment offered much shorter questionnaires. Betterment asked only three questions, none of which addressed investors’ risk tolerance, McDermott said.

“With Betterment, they don’t probe risk tolerance at all. They don’t ask the investor to self-identify, they don’t ask questions to get that information. They base their recommendations on age, assets and the time horizon to the goal that you’re creating.”

Some firms with more robust questionnaires asked investors to self-identify their risk tolerance, but “we don’t think that is necessarily sufficient to truly understand an investor’s tolerance,” McDermott said. He noted that none of these firms asked about users’ experience investing.

“You might have somebody who’s never invested before identifying their risk tolerance,” he said. Even experienced investors may overestimate the amount of risk they can stomach when they’re ticking boxes in an online form. “That’s very different from actually living though a major market decline and seeing your portfolio drop by a significant number.”

E-Trade and Merrill Edge have the most thorough risk tolerance assessments, Corporate Insight found. About half of their questionnaires were dedicated to users’ risk tolerance, and were designed to understand users’ investment philosophies and responses to hypothetical situations.

McDermott noted that an effective technique firms with longer questionnaires used to keep investors from dropping off include progress meters and automatic scrolling to keep investors moving through the questionnaire as they answer questions.

2. Customer Control and Customization

Some platforms give users more control over the recommended allocations, Corporate Insight found. Betterment, Wealthfront and Fidelity Go give users complete control, while E-Trade and Merrill Edge offer no flexibility.

Vanguard and Personal Capital allow users to make adjustments, but they have to go through an advisor to do it, rather than online.

McDermott said that platforms like Schwab and Future Advisor, which let users make some adjustments to their allocations on their own, give users a better customer experience. Giving them complete control “may be compromising the quality of the advice that they’re receiving and I’m sure will cause lots of concerns and headaches with your compliance team,” he said.

3. Hybrid Pros and Cons

Some of the platforms Corporate Insight examined are hybrid offerings that include digital advice with a human component. All of the hybrids examined for the report required users to speak with an advisor to open the account, McDermott said, and some required multiple meetings. The process took about a month, he said, “significantly longer than opening an account at the other firms.”

However, there some ways hybrids can smooth the process. Vanguard allows users to start the process online by filling out some background information and answering simple questions, McDermott said. When users get to the consultation phase, the advisor is able to speak to the client’s specific financial situation, he pointed out. “If you don’t have that data collection process online at all, the initial consultation, in our experience at least, was less productive.”

(Related: How Much Traction Do Robo Hybrids Have With Investors?)

Ultimately, forcing users to speak with an advisor detract from the overall experience, Corporate Insight found. Some platforms justify their higher costs with the human advisor offering, McDermott noted. He pointed to TIAA’s new robo offering as an example of a firm that “is really embodying what we think could possibly be the best hybrid experience.” Users can open an account themselves on online, or call to speak with an advisor for no additional cost, he said.

McDermott added that while the plans produced by the hybrids Corporate Insight examined were more personalized than the purely digital offerings, they lacked detail.

“If you are targeting more experienced investors, people who have been in the market for a long time and maybe have worked with an advisor in the past, and you’re telling them that they’re going to receive a financial plan, there’s a chance that they might be a little disappointed or confused with the actual output they receive,” he said.

4. Products and Service Offerings

Financial planning rather than simple portfolio management is a key driver of satisfaction and loyalty for users on digital platforms, McDermott said.

Moving forward, he expects providers to add additional investment products and services to their offerings. E-Trade has already started offering mutual funds, and TIAA’s new robo will have mutual funds and some actively managed funds.  

“It will come at a higher cost, though; at least the underlying fund expenses will increase, which is moving away from why digital advice started from the get-go.” Even so, he noted, “there’s no reason to not give your potential clients what they want. There are customers about there who would like a portfolio with a blend of mutual funds and ETFs.”

Incumbents like Vanguard and Schwab have a different target customer from Betterment or Wealthfront, McDermott said. Their customers tend to be older and more experienced, and are looking for a service-driven experience.

He added that the sophistication of strategies at robo providers is improving too, with tax-loss harvesting becoming more common as an included feature. Betterment and Wealthfront offer it at no additional cost, while Schwab offers at it to customers with at least $25,000.

More sophisticated automation and AI-based services have a “lot of untapped opportunity” as well, he said. 

— Related: How Much Traction Do Robo Hybrids Have With Investors?


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