Joshua Satten, at Sapient Consulting describes how robo-advisors are shaping the financial word, and especially asset managers.
Digital banking technology is ushering in a new trend of instant, app-led services. Consumers are signing up with firms they will never physically enter. They are also making investment selections, monitoring portfolio performance and reviewing statements without any personal interaction. So what does this mean for asset managers?
From a banking perspective, the demand for digital services is growing with the adoption and conversion of existing customers moving to digital channels. For investment managers, robo-advisory services growth is coming from new service utilization, meaning sign-ups from customers who have never used a digital asset management service.
This growth is seen across a wide array of economic classes in the 24 to 35 age demographic as different investment managers offer different account minimums. For example, digital-only start-up Betterment offers no account minimum, while T. Rowe Price ActivePlus Portfolios require a $50,000 minimum, initially only to their existing IRA customers.
Traditional firms can’t ignore robo-advisory services
Questions still remain on how to actually grow and expand market share with the addition of robo-based services. While this sector very much started as a play toward millennials, it has increasingly become a move to preserve existing and traditional client bases as well, similar to the origins and rise of the exchange-traded fund (ETF).
Despite excitement and interest around robo-advisory services, it will likely take years before start-up, digital-only asset managers obtain meaningful market share. The robo-advisory market only comprises roughly a few billion in assets under management, while the traditional global asset management industry is trillions. To say it another way, the collective AUM of all of these new robo services is a drop in the bucket of the domestic retail investment space, meaning we're talking about maybe 1 percent of current retail investable assets.
Many clients typically signing up for most of the available robo-advisory services, services that represent the digitization of investment advisory services, are also looking for all complimentary processes to be digitized as well, including onboarding, account updates, tax reporting and more. Without smooth onboarding, many clients would be lost in the onboarding process.
It’s the same with the new digital banks we see coming to market. There are no brick-and-mortar locations and the companies are, for the most part, entirely new brands. There is a vast difference between attracting the newest customers (those who have never used an investment service) and existing customers or those from other companies. Beyond initial adoption and conversion, the real hurdles are breaking into the lower and higher client brackets (i.e., managing assets outside of the $5,000-100,000 range).
Still, traditional firms can’t ignore robo-advisory services either. Ten years from now, most investment accounts will likely be selected digitally. In 20 years, most customers will be accustomed to a digital-only selection, perhaps having not even known an alternative. It remains to be seen how the investment returns of robo-advisors will ultimately compare with traditional wealth advisors as well as how the related rise of real algorithmic trading will affect the robo-advisor trend.
So where does that leave traditional asset managers? We see the impact of digital banking and robo-advisory services in three ways:
1. Attracting future customers. Asset managerscan leverage digital or robo-advisory services to increase brand awareness and begin to attract a customer base that does not have an investment account or are not yet eligible (e.g., due to investment account minimum requirements, etc.).
2. Secondary offerings. Asset managers can provide existing customers another channel for their investments. Maybe a customer wants a secondary account that is digital and easier to manage. Firms could also offer their own robo-advisory services or repackage their existing funds within robo-advisory channels to reach a new, digital-savvy audience.
3. Acquisitions. Asset managers can seekout companies to either acquire or partner with to increase their market share as the industry transitions into more digitally led service offerings.
Ultimately, what are the risks beyond scalable growth and increased brand awareness as long as the related technology is built and operates efficiently?