Can Facebook, Apple, Amazon, Netflix or Google (FAANG) conquer financial advice?
Research from Cerulli Associates asks the question, “How would the market react if the world’s largest tech companies entered the digital financial advice market?” These megafirms have the tools and data to excel, but they face significant obstacles that “will likely preclude their entry,” according to the Cerulli report.
Scott Smith, director at Cerulli, points out that Cerulli research shows that, overall, only 12% of investors comprise the digital advice opportunity segment. That rather limited market is one obstacle for potential entrants from the technology segment.
“These large technology firms excel by meeting unmet demands through scalable technology,” Smith said in a statement. “However, the level of nuance and regulation inherent in financial advice engagement would be difficult to scale to be of strategic interest to the world’s largest technology providers.”
Cerulli uses the example of Amazon CEO Jeff Bezos frequently citing the aphorism, “Your margin is my opportunity.” With the increasing interest in lower-cost investing options, the financial industry’s margins are already in decline, according to Cerulli.
“Becoming a late entrant in a declining-margin business offers little appeal to large, profitable technology providers,” Cerulli states.
Another challenge that technology leaders face is creating a digital platform that can be considered trustworthy and secure.
“Investors select transparency as the most important criterion in choosing an advice provider,” Smith said in a statement. “These firms’ overriding fiduciary duty is maximizing shareholder value, which does not correlate with building long-term trust in potential investor clients.”
Cerulli says that the biggest tech companies have access to an “amazing amount” of household-level data and they use it to maximize their own revenues through product placement and advertising.
The final consideration hindering the entrance is adding a scalable human advice element to digital platforms.
“Ironically, one of the biggest challenges that the ‘robo-advisor’ platform faces is hiring enough financial planners to handle the influx of investor inquiries,” Smith said in a statement. “Even investors who thought they would prefer purely digital self-service relationships frequently want discussions with human advisors.”
According to Cerulli, the providers that combine the best aspects of traditional advisor-centric advice models with technology platforms to optimize both client experience and advisors’ productivity will increase their market share.
“Cerulli believes that the long-term market leaders will offer flexible hybrid models. Adapting to this model is within the range of possibilities for the firms within the FAANG group,” Smith said in a statement. “It aligns well with their relative strengths, but also creates significant reputational and regulatory risk that significantly limits the appeal of market entry.”
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