TheWall: Trends: Robo-advisors to steer growth of financial advice market

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 24, 2018 - December 30, 2018.

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Robo-powered advisory services will continue to draw new customers into the financial advice market next year, including those in the mass market segment. The future model of digital advice is likely to combine digital investing services with robo-advisory platforms, says Deloitte.

In its 2019 Banking and Capital Markets Outlook: Reimagining Transformation report released earlier this month, the firm cited JPMorgan Chase’s (JPMC) new offering, which combines its free stock-trading platform You Invest with micro-investing application Acorns, as an example.

“This could be an important shift in how different solutions are bundled (low-cost trading platform, savings tools and advice engine). This could be revolutionary in the sense that advice would become the core of all consumer financial relationships, even with mass-market customers. It may no longer be chequing or current accounts,” says the report.

According to Deloitte, while digital advice platforms are capturing a greater share of assets in the global wealth management landscape, the threat to incumbents from robo-advisors and financial technology (fintech) players is now lower. The focus is shifting to how financial-service players can embed digital advice more seamlessly into their current offerings.

“In the product area, the shift towards zero or low-cost products and the push for greater fee transparency is changing market dynamics significantly. Responding to new entrants that offer feeless trading services, such as Robinhood and eToro, the incumbents are getting into the act. JPMC recently launched a digital investing service, You Invest, that includes 100 free trades in the first year,” says the report.

It adds that revenue for the largest global wealth managers is estimated to grow at a compound annual growth rate of 4% for the next two years. While much of the profitability may still come from the high-net-worth segment, the asset growth from digital platforms and low-cost service offerings should contribute to the revenue mix.

“However, the prospects of a market slowdown, the growth of digital advice platforms, regulatory uncertainties, the drive towards low-cost options and the push for greater price transparency would create a challenging environment for banks’ wealth management units. As a result, businesses cannot be complacent and should leverage these good times to fund internal investments and drive the transformation of their business,” says the report.

“Wealth franchises should invest in improving the customer experience and expanding their product suite to include goal-based advice, tax strategies and estate planning. This could be just as important as investment performance to sustain growth.”


Push for product rationalisation, price transparency

The move to fee-based relationships brings stable and predictable revenue together with more scale and simplicity, says the report. However, it does increase the risk of running a fiduciary business along with the transaction business.

The report adds that it could be important for wealth management businesses to focus on a larger share of “discretionary mandates” with higher margins — with wealth managers having more discretion to manage assets — to fight fee compression from the product side.

In response to customer demands and regulatory expectations, managers could be forced to rationalise their product portfolios and boost price transparency, says Deloitte. “Start-ups such as Bloom, ForUsAll and Guideline are intensifying the competition through clear fee structures.”

It adds that banks are expected to make significant investment in data management, analytics and artificial intelligence to improve both the customer and adviser experience. “Also, real-time forms, identity verification and video chat or recording compatibility that improves on-boarding should become a standard in wealth management. REACH, a fintech firm that enables organisations to close transactions remotely by verifying clients’ identities and getting their signatures on documents in real time while video recording the whole session, is an example of this.”

While the needs of the different wealth segments — the ultra-high-net-worth, high-net-worth and mass affluent — are likely to continue to vary, there is one commonality in how automation or digitalisation is impacting them all, says Deloitte. “Blending high-touch, or personalised services, with low-touch, or automated interactions, could be key to improving the customer experience and maintaining profitability.”


Improving the customer experience

On the retail banking side, investments in mobile technologies have increased meaningfully, with Asia-Pacific leading the world in the rapid adoption of digital banking, following the constantly evolving demands of consumers. Banks are taking their cue from other industries when it comes to improving the consumer experience.

“Deloitte’s recent global digital banking survey across 17 countries showed that banking consumers have a stronger emotional connection to technology brands such as Apple, Amazon and Google than to their banks. Some of these companies’ ability to blend experiences from the physical and digital worlds is considered a good model for banks,” says the report.

In response to this, banks are boosting technology spending on channel improvement to stay ahead of the curve, says Deloitte. The channels it listed are branches, ATMs, call centres and digital banking. “JPMC has adopted ‘mobile first, digital everything’ while Santander has four investments in the online lending space alone.”

Deloitte expects banks to become more active in the fintech space, either by launching standalone digital banks or through partnerships. It also expects online lenders’ growth in student loans, home equity and personal loans.

The importance of the branch in attracting and retaining customers, however, should remain. A recent survey indicated that branches will continue to have value, especially with greater digital enablement, says Deloitte. “The need to create a seamless omni-channel experience to improve the customer experience has been around for some time. With the available technologies, retail banks are expected to make significant progress in operating in a fluid, post-channel world.”