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.”
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.