Of Investments and Algorithms

Banks look to robo-advisers to meet changing customer needs.

By Monica C. Meinert

Would you trust a machine to manage your money?

That’s the question millions of prospective investors are asking themselves as a new wave of robo-investment options comes to the fore.

The robo-advice landscape has seen rapid growth over the past two years—just under 60 percent of the digital advisory companies currently in existence were founded since 2014, according to a recent study from BlackRock. That trend isn’t likely to slow down, as consumers continue to gravitate toward easy-to-access, digital financial management tools that they can take advantage of on their own terms.

In addition to being easily accessible, robo-advisers also address the high-cost entry barriers that generally prohibit individuals with fewer assets from investing. Historically, it’s been something of a vicious cycle: to build wealth, you need good advice, but in order to obtain that good advice, you have to have wealth to invest. Given that, it’s little wonder that a mere 28 percent of Americans use a professional financial adviser, according to BlackRock. And even for those that do use professional wealth advice, costs can often become too high for them to continue—one in four consumers said that they stopped using their financial adviser because it was too expensive.

“Traditionally, the only cost-effective way to serve people at the beginning of their wealth journey has been a brokerage model, where it’s much more around payment for the product or for the trade,” notes John Fishback, a principal executive adviser for CEB, a technology and best practice insight company based out of Arlington, Va. “What’s interesting about robo-advice is that for the first time, it has made portfolio construction and asset allocation much easier to do at scale, and therefore it can provide that level of assistance to a client who it would have been difficult to reach before.”

“The robo-adviser can be a good starting point for many tech-savvy investors who are comfortable reaching conclusions and implementing solutions using a technology platform,” adds Barry Dayley, EVP at Money Concepts International, which ABA endorses for wealth management and financial planning solutions. “We are beginning to see several wealth management firms implement the robo-adviser platform for clients who have lower asset values and who are tech-savvy.”

Robo-advisers rely on algorithms to make investment decisions and manage customer portfolios. A relationship with a robo-adviser usually begins with the consumer providing information about their goals, age and risk tolerance. Based on the customer’s response, most robo-advisers will select a combination of low-cost mutual funds or exchange-traded funds, automatically balancing the portfolio over time.

“The important way that the robo-advice model is different than the traditional [wealth adviser] model is in the order of operations,” Fishback explains. Unlike a traditional wealth management model where the process begins with the exchanging of information between a client and an adviser who then uses an institutionally-provided tool to make determinations about asset allocations, robo-advice typically involves the client directly interacting with the tool, which in turn delivers an optimized portfolio.

“I think appeal is pretty straight ahead,” he adds. “You can get that portfolio construction and asset allocation at a much less expensive price.”

And data suggests that the appeal is cross-generational. According to CEB research, just under 30 percent of millennials (those aged roughly 18 to 35) said they were already using a robo-adviser or likely to do so in the next 12 months. Sixteen percent of Generation Xers and 7 percent of baby boomers said the same. With the popularity of robo-advice continuing to grow, banks are beginning to enter the automated investment space to meet customer demand and engage new demographic segments.

“[Robo-advice is] less an alternative model and more an alternative approach to doing the thing all wealth management firms, and frankly, all banks are trying to do, which is to help clients in the best way possible,” Fishback notes.

Reaching the ‘millennial-minded’
While many banks are opting to partner with fintech companies like Betterment, Wealthfront or FutureAdvisor to offer custom-branded, white-label solutions, McLean, Va.-based Capital One Financial Corp. took a different approach and built its own platform—the only top-10 bank to do so thus far.

Yvette Butler, president of the company’s investment arm, Capital One Investing, says that innovation is critical for the bank’s success. “We have to disrupt in order to attract customers to work with us,” she says. “Our goal is to create these disruptive, empowering, amazing consumer mobile experiences.”

With its robo offering, Capital One wanted to target not just millennials, but a broader range of tech-savvy consumers. “The way we describe our target segment is millennial-minded,” she explains. “For many people—really led by millennials—most buying experiences start on mobile or digitally. What folks who are millennial-minded are looking for is transparency…about what you pay, what the role of the adviser is.”

Capital One was uniquely positioned to innovate internally, she adds. In 2012, the bank acquired ING Direct, including Sharebuilder, ING’s all-digital, self-directed trading platform. Building on that existing platform, the bank layered in an automated advice component, creating a new offering—Capital One Managed Portfolios—which launched in June 2016.

Based on their goals, risk tolerance and investment horizon, Managed Portfolios clients are placed into one of seven low-cost, third party ETFs managed by Capital One Advisers Investment Committee, which Butler chairs. Customers can get started with an initial investment of $25,000, and pay an annual 0.9 percent advisory fee.

But the bank also recognized the importance of including a human component.

“Our research shows that customers want both—from millennials to baby boomers, they want the best of both worlds,” Butler says. “They want the things that technology can do well, like rebalancing your portfolio [and] 24-hour monitoring, but they also want access to an unbiased adviser that can help them navigate through their life events and help them reach their financial goals.”

To meet this need, Capital One also launched Adviser Connect, a service that allows the bank’s wealth management customers to speak directly to an unbiased wealth adviser for free over the phone. Capital One advisers—most of whom are Certified Financial Planners—are salaried and earn bonuses based on the new business they attract and customer satisfaction, rather than fees and commissions on trading activity.

“When life happens, you want someone who has helped people with retirement planning before, or has helped people navigate through a market correction before,” Butler explains. “This new, millennial-minded person who really wants all that power at their fingertips, but also understands the value of the adviser—that’s who we really built the hybrid model for.”

Community banks go robo
For community banks that thrive on personal touchpoints, the concept of “robo-advice” may seem a little antithetical to that core mission.

But Wayne Patenaude, president and CEO of Cambridge Savings Bank, a $3.2 billion Boston-area institution, saw a strategic opportunity to use a robo-investment tool to attract younger customers and fill a gap in the bank’s wealth management offerings.

As the first community bank to directly integrate a robo-advice component into its retail banking services, Cambridge Savings Bank is a true pioneer in the robo-investment space. Prior to rolling out Connect Invest—the bank’s name for its new platform—Patenaude says Cambridge Savings Bank had primarily focused on providing trust services for high net-worth customers.

“We decided that a better opportunity for us, frankly, was in the mass affluent market,” he says. “We’re interested in growing the younger demographic segment that is interested in having investment advice provided for them at an affordable price.”

In evaluating a number of potential partners, the bank found the right fit in SigFig, a Silicon Valley robo-adviser. Their business-to-business-focused solution appealed to the bank, says Dan Mercurio, SVP and head of consumer and small business banking. Working with SigFig and Digital Insight, the bank’s online banking provider, Cambridge Savings Bank was able to build the robo-investment capability into its online banking platform, giving customers the ability to access all of their accounts on the same dashboard.

“I think part of the reason behind the success of the integration was that there was a lot of excitement around it,” Mercurio adds. “Being first in this space that we know is gaining traction was appealing to all of us. I think that common objective helped rally both the team at Cambridge Savings Bank, Digital Insight and SigFig to work together to make it happen.”

Like Butler, Patenaude and Mercurio learned by talking to customers that they would need to include a human touch. “The customer research we did … affirmed the need for human interaction carefully placed throughout the client’s experience,” Patenaude says. Connect Invest clients can access registered representatives through SigFig to help them meet their investment needs. Customers can contact a human wealth adviser by phone, using an online chat function or even by video conferencing from a branch in person.

Compliance was also a central focus for the bank as they developed Connect Invest, Patenaude adds. “This is new,” he acknowledges. “Yes, there are rules surrounding non-deposit investment products, but those rules were written in the mid-90s. We had a lot of discussions with our counsel and felt really comfortable that what we were doing was going to work from that side of things and wasn’t going to impact the customer experience.”

Mercurio notes that the successful partnership with SigFig was a true beta test of the bank’s ability to nimbly respond to changing customer demands, and came as a result of careful planning and strategic leadership. And as more customers adopt Connect Invest, he sees more opportunities ahead.

“We firmly believe that Connect Invest will be the core of what we do from an investment management standpoint on the retail side,” he says. “We’re going to listen to our customers, understand where they are seeing value. Based on our partnership with SigFig, we find ourselves in a position where we can really co-innovate with them and help decide what this product looks like for our customers.”

Preparing for an era of automation
The advent of any new disruptive technology brings an opportunity for banks to assess where they are and where they need to go strategically to meet the needs of their customers, and the rise of the robo-advisers provides such an opportunity for banks in the wealth management space, Fishback notes. First and foremost, he says, banks should look at whether or not what they’re offering is competitive.

It’s also a good time to examine existing wealth management partnerships, start conversations about whether and how the needs of the bank are changing and ensure partners are providing the best value, he adds.

“As community banks think about what the wealth management business is going to look like and require five, 10, 20 years from now, they need to think about a competitive landscape in which robo-advisers—either independently or partnered with non-local institutions within their market—are active in acquiring and serving customers in their market,” Fishback says. “And they need to think about what that implies for their wealth management strategy.”

Learn more about the latest in tools and tech in the wealth management space at ABA’s WEALTH MANAGEMENT AND TRUST CONFERENCE, Feb. 22-24 in New Orleans. Register at aba.com/wmt.

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About Monica C. Meinert

Monica C. Meinert
Monica C. Meinert is associate editor of the ABA Banking Journal and ABA Daily Newsbytes.