Robo advisors plus

One of the hottest topics in investment advisory today is automated online services known as “robo-advisors.” If we believe media reports, these low-cost digitized business models will soon be standard for smaller investment clients. That aside, it has almost gone unnoticed in recent months that major banks have extensively developed their investment advisory offers and adjusted them to meet new market requirements. Services, such as risk profile calculation, individual asset allocation recommendations, automated investment strategy monitoring, and actively reaching out to the client concerning strategy violations, are being bundled into different investment solutions.

Unlike the robo-advisors, which aim for a fully automated investment process, established banks primarily link technical innovations with traditional advisory services. They claim to serve the needs of different client groups more closely; however, are they able to achieve this goal in reality?

Differentiated Offers

Currently, if a private client at a universal bank decides to use investment advisory services, in most cases, there are typically two primary choices: a fund-based entry offer or one with intensive advisory services to address diverse investment instruments. Smaller clients receive the entry offer, which, based on new automated portfolio management systems, includes annual portfolio checks and advisory discussions to monitor the investment strategy, otherwise known as a passive investment advisory service. For more demanding clients, active investment advisory services are available, including daily portfolio monitoring and active notifications about individual definable risk parameters via e-mail or SMS. More seldom, committed investors may receive a third offer whereby particular private and major banks grant access to personal investment specialists from their own research departments and trading desks.

Most of these new offers promote a portfolio-based advisory approach, which is regularly monitored so that, with every investment proposal, the instrument’s individual risk-return profiles are aligned as a whole and the overall portfolio allocation complies with the client’s selected investment strategy. The previously common process of assessing performance expectations of individual stocks, isolated from the portfolio allocation, then becomes a thing of the past.

At first glance, staying at the forefront of technological change seems to make sense with advisory services. According to bank estimates, this makes it possible to optimize the performance of up to 50% of existing portfolios. However, this estimate is based on the assumption that all advisory service clients are invested along their selected investment strategy diversifying their portfolio by investing in different asset classes. Here, we can identify the first weakness.

Our recent study investigated client expectations of investment advisory services at selected universal banks. It showed that between 25% and 30% of clients expect advice on their own transaction ideas (also known as transaction-based advisory services) regardless of the impact of this single transaction on the overall portfolio allocation, a service included in portfolio-based advisory. For example, this group – small clients as well as experienced private investors – would like specific estimates for individual investment proposals that consider unexpected market movements, such as with the sudden stock market plunge in August of this year.

Furthermore, these impacted portfolios are typically not diversified with the classic portfolio management approach taught by Harry Markowitz, but distinguished by a consciously selected investment focus. This focus could generate an overreliance on themes, industries, or individual stocks, for example. Clients with such portfolios are often not receptive to portfolio-based monitoring services. If a bank provides such a client with portfolio-based advisory services, including regular portfolio monitoring, the advisory offering is not in line with his/her expectations of a more personal transaction-based approach.

Active Management

From a client perspective, the second challenge with new digital offers lies in the access to active investment advisory services, which are often only included in high-level premium offers and are mainly provided by an advisor in person. These offers come with high minimum fees or minimum deposits requirements, thus locking out smaller, less wealthy clients. On average, only between 5% and 10% of advisory clients opted into offers with active investment advisory services, even though between 20% and 25% would welcome active advice.

Moreover, the demand for active contact typically does not depend on the account size, transaction activity, or portfolio composition. If a bank sets the target to advise its clients according to their preferences and knowledge, it should also strive to actively address all interested clients, and not only the small segment of premium clients.

So, while industry-wide development in investment advisory services provides clients with major advantages, individual client needs should be an additional focus in designing advisory offers. As a universal bank, it is not enough to just introduce automated investment processes such as robo-advisors, which largely neglect the interests of large client groups. Instead, new technologies should support the banks to offer their core competence – investment advisory services – in an up-to-date manner and based on the needs of different clients groups.

On one hand, it is about offering the clients the type of advisory services that they specifically request (transaction or portfolio-based). On the other hand, digital opportunities should be used in a way that the advisory experience can be efficiently offered in the desired form (active or passive) to all clients that request it, small or large. If banks can implement the heterogeneous requirements of their target clients, they will be able to advise clients profitably in the age of digital investments.

Mr. Gilomen is a director in the Banking competence center in the Zürich, Switzerland office of Simon-Kucher & Partners. Mr. Chung is a director in the Banking competence center in New York. They can be reached at [email protected] and [email protected]