Web Counselors

By Julie Monahan

To be truly productive, automated financial planning tools must be integrated into an overall package of investment services.

Banks spent the last decade trying to expand their role as providers of investment services. One obstacle they've run into is the reluctance of many middle-income customers to pay for personalized financial advice. And the people who are willing to pay often seek that advice from more specialized nonbank providers.

Now, with the emergence of online financial planning tools, banks have a fresh opportunity to crack the market. Priced at a fraction of the cost of a live advisor, these automated advice engines represent a rich opportunity to expand financial planning to a broader base of customers. "Online financial planning tools provide a great way to introduce banks as a trusted financial advisor and segue customers into more transactional services, such as brokerage," says Stephen Franco, senior e-finance analyst at U.S. Bancorp Piper Jaffray in San Francisco.

Isabella Fonseca, an analyst for Celent Communications in Boston, says banks can use the online tools to increase the lifetime value of their customer relationships by an estimated $3,000 each, mostly by cross-selling investment products. Celent predicts online planning usage will grow from the current level of 2.1 million users to 20 million by 2005. U.S. Bancorp Piper Jaffray projects an even higher usage for 2005: 35 million.

The challenge, however, lies in properly integrating this technology into an institution's overall asset management package. Institutions cannot simply install planning software on their Web sites and assume customers will embrace it. For one thing, the automated financial planning engines require customers to fill out multiple fields with data about their assets and liabilities, a tiresome task for anyone who doesn't have all their financial data close at hand. Even the popular Quicken.com personal finance site has struggled to lure its users from simple record-keeping tasks to the program's planning functions.

For that reason, the various vendors in the field are currently working to make their offerings friendlier to users. The vendors are getting a lift as the banking industry progressively adopts account aggregation technology, which assuages some of the data entry problems by allowing users to automatically import account records into the appropriate fields.

Beyond solving the usability problem, banks will need to market the automated tools within the context of an overall package of online financial services. The tools must be supported by a full array of investment products, for example.

And institutions will need to provide adequate customer support. While automated financial planners are much cheaper to maintain than a staff of certified financial planners, they still must be backed up by well-trained employees who can answer questions and help steer customers to appropriate investments.

This raises an important point: automated tools complement but do not replace human advisors. Providers that have experimented with this technology say it works best when customers collaborate closely with their financial advisors on using the online tools.

Data Hunt

The market for online financial planning advice is potentially huge. It has been estimated that only around 20% of the population with investable assets has consulted a professional, in part because of the perceived high fees charged by professional planners. Those planners, in turn, tend to focus on the high-net-worth customers.

E-commerce arguably equalizes things for the great mass of middle-income investors. Many already take advantage of cheap online trading. Now they can also access the two dozen or so online financial planning engines that offer automated advice for between $75 and $150 per plan.

These financial planning engines provide either single-event analysis, focused on, say, retirement, or a more comprehensive plan that accommodates multiple goals over a lifetime. Some of the firms in the single-event category are mPower Advisors LLC, San Francisco; Financial Engines Inc., Palo Alto, Calif.; and TeamVest Inc., Charlotte. Leaders in the comprehensive category are DirectAdvice.com Inc., Hartford Conn.; Advice America, Freemont, Calif.; and Boston-based AssetPlanner.com.

None of the firms have been very successful marketing their products directly to retail customers. As with most things on the Web, people just don't want to pay for information. For that reason, the vendors have turned to institutions such as retirement advisors, banks and brokerages, which typically offer the tools to their customers for free in the hopes of selling other investment products. Merrill Lynch & Co. Inc., Charles Schwab & Co. Inc., and E*Trade Group Inc., for example, have recently announced programs to offer the automated planners, either separately or in conjunction with human advisors.

All providers will have to cope with the usability problem. Most plans require about 30 minutes to complete, not counting the time an individual must spend searching for account records and financial statements. This complexity has hindered market acceptance.

In its recent survey of 100 U.S. financial services firms, which included banks, brokerages and retirement planning services, Celent found more than 80% offered some form of online planning tool or service. The great majority of these tools, however, were simple calculators, such as those that calculate mortgage payments based on a certain size loan and interest rate.

Account aggregation technology, which is becoming increasingly popular in financial services, should encourage the use of more complex tools. It relieves customers of the need to hunt down all the data on their own. Assuming customers have their main accounts listed on the aggregation site, the planning engine can simply import those files automatically.

Overcoming Inertia

Once usability improves, institutions will need to focus on deploying the automated planning technology to best advantage. Marketing is critical. Experts agree that the tools are most effective when offered as part of a comprehensive package. Some banks, for example, are providing them as part of their overall 401(k) services.

Joseph Eck, senior vice president at Mellon Financial Corp.'s Dreyfus Retirement Services division, says advice engines are a useful supplement to retirement services that help participants invest more wisely. Eck says this aspect especially appeals to plan sponsors, who want clients to tap into the proper investment choices. "No provider wants to be in a situation where people do not use these benefits the right way," Eck says.

Earlier this year, Dreyfus began offering a financial planning tool from mPower Advisors, which specializes in online advice for defined contribution plans. Eck likes the program's automated links to investor account records and employee data.

The mPower engine can, for example, compare how employees' selected funds match their stated tolerance for risk. The system also weighs employee income and determines if contribution levels are too low. And the automated link between Dreyfus and the online advice engine enables plan participants to execute the recommended action as soon as the advice is delivered. "That really helps overcome investor inertia," Eck says.

Dreyfus doesn't benefit directly from those recommendations, however. As a plan administrator, it would be a conflict of interest for Dreyfus to make product recommendations. But the financial planning engines still should help the company indirectly by increasing assets under management and enhancing Dreyfus' value to the plan's corporate sponsor.

Such restrictions don't apply, of course, outside of a defined contribution plan. A bank that uses an automated planning engine in conjunction with its ordinary investment services would be allowed to cross-sell products. At the same time, managers need to think long and hard about whether they should offer their customers proprietary products only, or those provided by competitors as well.

Customers may be put off if the choice is too limited. Karen Wendel, a partner at the Capital Markets Company, a San Francisco consulting firm, recommends that financial institutions offer the broader product menu, noting that people can easily compare products on the Web. "One thing the Internet has taught us is that openness is the only thing that works," Wendel says.

When a bank is positioned in the role of advisor, it can help customers navigate a wide range of options, including its own offerings, she adds. "You create greater loyalty if you provide advice and support."

Role of Advisors

The issue of support, in fact, is critical to the effective use of automated financial planning engines. Essentially, they're only as good as the information provided by customers, which may be sketchy or incomplete. Bankers who have experimented with the technology say it works best when supplemented by human advisors.

"It's hard — and sometimes even dangerous — to build everything into a canned model," says Stephen Clifford, director of Cititrade.com, the online trading arm of Citicorp Investment Services in New York. "A young person, for example, can't just print out a plan and think everything will be hunky-dory from then on." There are other life-stage events that need to be accommodated as well, such as caring for disabled family members, planning for a major inheritance or managing stock options.

For these reasons, an individual's plan must be continually updated, usually with the help of a human advisor. "Software tools can do 60% to 70% of the heavy lifting," says U.S. Bancorp Piper Jaffray's Franco. "The rest of the job still requires some level of personal service."

Most of the online financial planning vendors have therefore designed their products to work with advisors as well as customers. The tools actually make advisors more productive by speeding up the creation of plans for clients whose financial profiles are less complex. Advisors can share information electronically with their customers as they construct plans, and then update the scenarios as needs and circumstances change.

Columbus, Ga.-based Synovus Securities has adopted that strategy with an online planner it purchased from Cofinity, an Austin, Tex., software firm. Synovus Securities is a subsidiary of Columbus, Ga.-based Synovus Financial Corp., a holding company for 39 community banks in the southeast. Customers of those banks are invited to use the product either at home on their own, or with a Synovus advisor at a branch. Once a plan is developed, Synovus advisors emphasize the need for regular reviews. If a customer modifies a plan at home, a financial consultant will call to see if the customer wants to make those changes permanent.

Synovus Securities president Dan Mallard says this collaborative process helps strengthen customer relationships. "Experience has shown us that when a financial consultant provides a client with long-term solutions, that client will eventually move more assets to the consultant."

Even if customers don't purchase investment products immediately, banks can gain some useful insights for their ongoing marketing and product development programs. For example, they can observe which products online customers seem to be interested in, sift through feedback on their financial goals, and then use that knowledge in developing their overall package of services.

Institutions must take care, however, to provide adequate customer support when people are filling out the questionnaires. Some customers will need a lot of help answering the advice engine's questions. Failure to provide that support in a timely fashion will cause customers to give up, vitiating the entire exercise. "You can create what you think is the most awesome application," says David Evans, vice president of advisory services at TeamVest. "But if customers don't know what to do, they'll just walk away."

Ms. Monahan is a freelance writer based in Seattle.

Copyright © 2003 by Banking Strategies, published by BAI.

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