Digital wealth Management

Is one digital advice model enough for all client segments?

Digitalisation in Wealth Management – a brief overview of the common digital advice models.

Introduction

Banks and other financial institutions have been occupied with digitalisation and wealth management, especially the advice process, for quite some time now. Over the course of the past year, multiple new digital advice models have been launched by different banks, independent of their size. In this post, we would like to examine the various advice models in more detail and answer the question whether a digital advice model exists that works for all client segments, so to say a «one size fits it all» solution.

Digitalisation of financial advising

Why should banks rely on digital advice models?

The digitalisation of advice processes not only serves to generate a modern appearance of the bank towards the client but also serves to support the client advisor when it comes to complying with all relevant internal and regulation requirements, so that they can, depending on the advice model, focus on the core of their work, the satisfactory client support. The digitalisation of the wealth management also offers the possibility for the bank to reduce costs or rather to establish more efficient and effective processes. Especially during times of shrinking margins, increasing regulation requirements and a constantly increasing competitive pressure, this is noteworthy. After all, banks can obtain a decisive competitive advantage through a broad digital offer, which is geared towards the needs of the clients, should attract clients of various segments individually and thereby retain the clients.

Which digital advice models exist?

The digital advice models that are used in practice, can be roughly divided into three groups:

• Digitally supported (face-to-face) investment advice
• Hybrid investment advice
• Automated investment advice (Robo Advisor)

The division takes place dependent on the degree of automation or rather the remaining direct client-advisor contact.

The allocation of the clients segments to the respective advice models made in Figure 1 corresponds to the usually addressed target groups in the field. This allocation should, however, not be seen as binding. Even though advice models with a low degree of automation and a close personal contact between client and advisor will hardly be found in future due to cost concerns, one cannot exclude that wealthy clients, found in the upper segments, refrain from face-to-face advice or at least for some part of their assets and make use of more automated services.

What are the special features of the models?

Digitally supported (personal) investment advice

We see the «digitally supported investment advice» as the first step towards the transformation of wealth management. This step has already been implemented successfully or is being implemented by numerous banks. The goal of the advice model is the digital support of the advice process by software solutions designed for that purpose. These software solutions, which are either in-house developments of the bank or licensed applications that have been adapted to their needs, support the advisor with:

• Client profiling,
• Analysis of portfolios,
• Simulation of investment proposals including pre-trade test and documentation,
• Implementation of periodical portfolio reviews including documentation,
• Portfolio monitoring (post trade test).

The demand for digital support with the advice process was especially accelerated by the regulations, such as FIDLEG (Switzerland) or MiFID II (Europe) that came in to force and that attribute a great importance to the protection of the investor. It seems almost impossible to efficiently comply with the new requirements without digital support. Particularly during times of shrinking margins and increasingly price sensitive clients, this would unnecessarily increase the costs for investment advice and thereby threaten the profitability of the offered processes.

Even if the advanced software solutions are designed in a way so that they can be used in face-to-face meetings (e.g. on a tablet or notebook), a consultation without the advisor is usually not intended. This is not bad per se, but takes into account that wealth management, especially when dealing with wealthier clients, is still a business in which the clients are primarily concerned with the trust in the financial service provider, the personal contact with the advisor (at least as a «Sparring Partner») and are looking for an advice process that is tailored to their individual needs. Nevertheless, the digitally supported investment advice offers the possibility to communicate with the client automatedly or manually via various channel. This means that, for instance, the investor profiling can be outsourced to a self-service area, alerts from the portfolio monitoring can be directly forwarded to the client or automated, investment ideas on individual portfolio level and manually created investment proposal by the client advisor (e.g. e-banking, client portals, mobile apps) can be shared and the consent therefore can be collected using the same channel.

Regardless of the above-mentioned reasons, we see the digitally supported investment advice as crucial advisory model within wealth management. On the one hand, it contributes considerably to a more effective and efficient advisory process. On the other hand, the client can already be actively involved in the advisory process via different digital channels. Ideally, however, financial service providers would only use the advice model «digitally supported investment advice» for wealthy or rather for the bank attractive (from an income perspective) clients, who lay great emphasis on an comprehensive and individualised advice with partly complex investment products, which requires a close involvement of the advisor. This is because the costs for advice in this model, remain comparatively high compared to other advisory models, particularly due to the lower level of automation and the persistently high level of staff deployment needed for personal advice.

Hybrid investment advice

The hybrid investment advice makes use of elements of the classical, the digital supported investment advice and the automated investment advice (Robo Advisors). It attempts to create an attractive offer for the client using the best of both worlds. In expert contributions, one can find different definitions of hybrid investment advice. Most of them have in common that they assume a fully automated investment process, but the client has the possibility at any point to fall back to the advisor in person.

In an ideal hybrid advisory model, the client profiling (risk profile, preferences, investment goals) occurs completely online by the client themselves. Based on the client profiling, intelligent algorithms will offer a suitable investment strategy and an optimal asset for the portfolio of the client. Here the investment universe should be significantly wider as it is the case with, for instance, the common Robo Advisors, that are based on investments in ETFs. In fact, the client should receive a basic proposal which they can build up to their portfolio independently using shares from the investment universe and considering the limits of client profile, preferences and investment goals. During this the client should be supported by the software wherever possible, so that they stay within the frame of their risk capacity, risk willingness and their return expectations.

If the client desires the support of an advisor, they can consult these directly online during the investment process. Depending on the need, chatbots, video chats or lastly also face-to-face meeting are possible. It is important that the discussion continues wherever the client left off in the online investment process, so that the client can together with advisor work towards a successful completion thereof. In the hybrid model it is ultimately up to the client themselves, how far they look after their investment themselves or whether they rather rely on the advisor partially or fully. Of course, the bank also has access to all communications channels besides the digitally supported investment advice in the hybrid model. Cleverly complemented by technologies such as Artificial Intelligence or Machine Learning, personalised investment proposals which are suitable for the client’s specific portfolios, risk profiles, preferences and investment goals, can be transmitted to the client. The goal of this is to increase the trading volume of the clients and generate more commission fees.

Service providers of hybrid advice models often use a pricing scheme with a low basic fee (analogue to Robo Advisors) and fee-based personal advice. As the fees for this model therefore is between the other two models, we see a great potential for the use in the field of retail, affluent, HNWI but also with UHNWI clients, who prefer more autonomy but in case of doubt are happy to fall back to a «Sparring Partner» in the form of an advisor. This model is also interesting, as it offers countless interaction possibilities between the client and the bank (digital and physical touchpoints). Therefore, it creates new possibilities for attractive digital services that can be monetarised with profit for the financial service providers.

Automated investment advice (Robo Advisor)

«Automated investment advice» encompasses the generally known Robo Advisors, which are completely automated and forego the personal contact between client and advisor.

Robo Advisors are based on intelligent algorithms, that automatedly suggest an investment strategy and an associated optimal portfolio based on the online identified client’s risk profile, their preferences and their investment goals. The portfolio is automatedly implemented, monitored and periodically adjusted by the Robo Advisor. Depending on the complexity of the algorithms and the software of the Robo Advisors, different investment services are offered. We will look at the operating modes and the types of Robo Advisors in more detail in a later blog post.

The advantages of the Robo Advisors are obvious and are often used as reason for them being used in the field. Due to the high automation compared to other advice models, Robo Advisors are considerably cheaper. They have lower costs due to the predominant use of passive financial instruments (e.g. ETFs) and the high staff deployment in the consultation. Hence, this results in the primary target group of Robo Advisors being the less wealthy client segments (retail, affluent), which slip through the net with the bigger wealth managers as they seem less attractive from a cost-perspective. Besides these, wealthy clients of the generation X («Digital Immigrants») and the generation Y («Digital Natives») are also drawn to the solution. They, on the one hand, appreciate the autonomy of a Robo Advisor, and on the other hand they are less receptive to the classical personal advice as they grew into or grew up with the daily use of digital opportunities.

Based on the above mentioned, we definitely see a justification for the use of Robo Advisors, but above all also a gain for wealth management and the investment clients. The difficulty of this advice model, however, lies in the scaling. The profitable operation of a Robo Advisor is highly dependent on the demand by the clients. If the critical size is not obtained quickly enough, the operation does not pay off from a financial perspective.

Generating demand seems especially challenging for smaller, independent Robo Advisors.  This can be explained by the lack of trust, unwillingness to change the provider or lack of capital or investment interest of the generation Y. Nonetheless, we see a certain prospective potential for the use of Robo Advisors, if they are used by established financial institutions or product suppliers as stand-alone offer for specific client segments.  That financial institutions refer to software providers for appropriate Robo Advisor solutions and accompany the development with their professional competence, seems to be a purposeful approach.

Conclusion

To sum up, it can be stated that there is no right or wrong advice model for a client segment. Rather certain advice models are better suited for specific client segments compared to others, e.g. in the case of the digital supported investment advice compared to the automated investment advice for HNWI and UHNWI clients. Nonetheless, at the end of the day the clients themselves decide which advice model is best suited for their needs. As long as the trust in completely automated solutions is lacking by small and independent providers and the unwillingness to change providers continues, banks do not need to worry too much. Nevertheless, we believe that an up-to-date investment advice should contain at least one digitally supported investment advice tool, which counts on a personal advisor and relevant software solutions. This is already applicable in all client segments and offers a substantial gain in relation to efficiency and effectiveness as well as a reduction in the liability risks due to an automated monitoring of the regulation requirements and the internal instructions.

In the ideal case, however, financial service providers can offer an appropriate advice model for all needs. Having said this, we are aware that this is mostly not feasible due to financial reasons (see also rentability of Robo Advisors). Therefore, the model of a hybrid investment advice is interesting for the future of wealth management. We believe that with this model in various forms, almost all of the different needs can be covered. Moreover, there are also fascinating opportunities for additional services and solutions that can be monetarised through the financial service provider.