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The new wealth of knowledge: Roboadvisors and the human touch

Mar 16, 2018 / Consumer Banking / Technology

The old saying goes, “If you can’t beat ’em, join ’em.” Ah, but not so fast if you’re a bank mired in today’s competitive roboadvisory environment. In that case, you’re not so much making plans to join ’em as to beat ’em at their own game.

With the gathering wave of roboadvisors battering down investors’ doors with promises of cut-rate fees, convenience and cutting-edge artificial intelligence, many financial institutions are preparing to battle for customers—and right on these upstarts’ home turf—by launching automated investing platforms of their own for smaller investors.

Banks hope that by meeting or beating the robos with automated products at a low cost, they’ll keep or capture a share of smaller investors, many of whom have only $5,000 or $10,000 to work with as they get started. Such accounts are too small to effectively work with a human financial advisor—but banks know that with patience and care, even smaller accounts can mature into more lucrative ones.

And cutting-edge banks believe that they have more to offer an investor than an independent roboadvisor because of the variety of financial services they can offer over a client’s lifetime.

“There is a big wealth transfer movement going on now from the baby boomers—even from their parents—and wealth managers are very concerned about maintaining familial wealth,” says Barbara A. Friedberg, a roboadvisor expert and CEO of Robo-Advisor Pros, an investment company review site.

That transfer, by the way, will mark the largest in history once the money works its way to the millennial generation. “So, if they (banks) can offer a product that can help them engage with their current clients as well as their offspring and their offspring, then they will become relevant. Or they will maintain relevance.”

The dollars at stake are huge. Baby boomers make up the single wealthiest generation in American history, and they are on the cusp of transferring an estimated $30 trillion in wealth to millennial investors; members of Generation X stand to gain handsomely as well.

Even more telling: A 2015 survey by Investment News shows that 66 percent of children fire their parents’ financial advisor after receiving their inheritance. The title of the story that reported this, fitting enough, was “The great wealth transfer is coming, putting advisors at risk.”

All this ferment helps explain why financial institutions are more open to roboadvisor services—and why traditional roboadvisors such as Betterment now work to keep the investors that they have by hiring full-time financial advisors who offer more sophisticated services.

In December, Morgan Stanley launched its automated investing service to clients with at least $5,000, with fees of 0.35 percent plus fund management fees. Bank of America’s Merrill Lynch charges 0.45 percent, and Wells Fargo & Co. charges 0.5 percent for clients who have at least $10,000 to invest.

“It’s almost like everyone wants to get in on the game, because there is just a race to the bottom for fees,” Friedberg says. “All the players feel that if they’re not providing the low-cost roboadvisors, then they’re going to lose clientele. And that pertains not only to the big warehouse brokerages but also to the mom-and-pop fund managers as well.”

San Diego-based Rich Keltner, senior vice president for advisory services with CUSO Financial Services (CFS) and Sorrento Pacific Financial, says his company is preparing new digital advice products for their clientele of credit unions and small community banks, to roll out early in 2018.

“When we decided to begin the project of developing a roboadvice solution, it was really at the prompting of our customers,” Keltner says. “The banks and credit unions approached us a couple of years ago. They were seeing this as an emerging trend. They kind of compelled us to begin the construction of the platform.”

CFS worked with California-based Jemstep Advisor Pro, a digital innovation firm, to create a “very straightforward” platform powered by exchange-traded funds managed by Invesco. The annual fee is 70 basis points, plus the internal expenses of the underlying ETFs.

Keltner notes that several forces drove the move, “but primarily they wanted to offer an advisory fee-based product for kind of their down-market clientele. With their emerging households—especially their younger households just beginning the wealth creation phase of the life cycle—they wanted to offer an advisory product option that was compelling and relatively low cost, but also high quality.”

As with other banks, investors of CFS’s platform must invest at least $5,000 to create a diversified portfolio of ETFs. But Keltner believes that the typical investor will deposit $10,000 to $50,000 into the automated platform.

One credit union working with CFS is Elevations Credit Union, located near the University of Colorado in Boulder. About a third of Elevations’ 110,000 customers are in the 21-to-36 age bracket, says John Marx, vice president and program manager of wealth management services at Elevations. “We’ve got to be proactive to work with those folks in the ways they want to work in our area these days,” Marx says, “and a lot of that is through the digital advice platforms out there after those dollars. We want to offer one so we can target those folks with our member reach programs—and have something for them to use.”

Marx points out that as millennials reach the earning years where they make enough to set some income aside, or inherit wealth from the previous generation, “We want to already have that relationship and not have to attempt to take it back from some of the other digital platforms out there.”

Unlike independent roboadvisors, banks and credit unions are in positions to offer clients more than just investing options. “They can provide mortgages, auto loans, insurance and long-term financial planning,” Keltner says. “Those are the types of services we can offer through the more traditional advisory channel that these clients are going to evolve to.”

Friedberg has a lot of confidence that banks will hold on to these clients—if they first succeed in capturing them with their robo platforms.

“If the premise is to get people in with low fees, eventually they’re going to amass more assets,” she says. And when that happens, they may gain an interest in and willingness to pay for greater services.

“Millennials, many of them don’t have a lot of assets, but they will,” Friedberg maintains. “So you get them in the portal—and you get them early. Then, once they get you in their system, you’re in. You’re not going to leave.”

And likely, neither will they leave you: a textbook case of “If they can join you, they can’t beat you.”

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Based in Maryland, Patrick Sanders is an assistant managing editor for U.S. News & World Report and formerly worked as an editor for The Associated Press and at newspapers in West Virginia, Connecticut, Pennsylvania and Indiana.

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