Automated Financial Advisers

By Deb Stewart

A recent study by Oliver Wyman showed that 70 percent of U.S. households with more than $100,000 in investable assets solicit professional financial advice. And these are the four services that those investors value most:

  • Financial planning to achieve goals.
  • Ongoing monitoring of investments.
  • Trusted advice for all personal financial affairs.
  • Investment expertise for making purchases/sales of securities.

Against this background there have been a number of recent changes impacting the delivery of U.S. wealth management services. Notably, the rise of automated financial advisers (“robo-advisers”), which moots the question of how much of the value currently provided by financial advisers these services can replace. Their disruptive potential of robo-advisers appears to be greatest in the following areas:

  • Low-cost investment management services—as a result of broadening the audience for these services.
  • Simplifying recommendations through automation or goal-specific construction.
  • Transparent pricing.

Several variations of “market disruptors” are attracting wide attention for creating these trends and addressing investor priorities in new ways:

  • Companies using robo-adviser models.
  • Companies using “virtual” advisers.
  • Companies combining traditional financial advisers with “virtual” advisers and robo-adviser models or some combination of these!

We talked to leading industry experts and to a prominent disruptor to learn what this might mean to banks in terms of the future delivery of investments and wealth management services.


“These digital entrants use a combination of simplified client experience, lower fees and increased transparency to offer automated advice direct to consumers,” says Juan Carlos Lopez, executive director, Ernst and Young. “Their new models have the potential to make advice for the mass market feasible at last and these changes are here to stay. So traditional players need to determine if and how they want to approach them,” Lopez says.

Robo-advisory is an automated investment service that can take on many forms. Some general characteristics of these offerings can include:

  • Portfolio composition grounded in customer’s definition of goals and risk profile.
  • Limited investment scope often focused in exchange traded funds (ETFs), index funds and cash.
  • Automated portfolio rebalancing occurs as market moves up and down.
  • Tax loss harvesting realizes opportunistic losses offsetting gains or ordinary income.

Some features, such as tax loss harvesting have previously been available only to the very high end of the investor market.

“The wealth management market has been in inertia for a long time,” says Bradley Kellum, partner at Oliver Wyman. “By creating a compelling client experience at an attractive price point, the current group of robo-advisers proves the business case for online savvy clients with less sophisticated needs, though they remain to be tested during a market correction. A key question going forward is how much of this can be applied to the value propositions and product suites for serving high net-worth clients—that will ultimately determine their full disruptive potential.”

Virtual Advisers

McKinsey and Company’s recent study, “The Virtual Financial Advisor: Delivering Personalized Advice in the Digital Age,” estimates that in the United States, 40 to 45 percent of affluent consumers who switched their primary wealth management firm in the past 24 months moved to a direct, digitally led firm—in many cases choosing to work with a phone-based adviser at those firms.

McKinsey finds that the virtual adviser model retains tailored service from qualified advisers, but replaces networks of branch offices with a central hub, from which advisers cover a dedicated set of clients via telephone, video conference and digital tools. McKinsey’s work concludes that this model allows firms to afford a superior proposition for offering financial advice, particularly for consumers with assets between $100,000 and $1 million (the “mass affluent”), who have been historically difficult to serve in a cost-effective manner.

The study states that virtual advice models are “critical for banks as consumers move to mobile but still prefer human contact for sales. With fewer branches, virtual advice will be critical. The model retains the high level of personal service that most consumers value from their financial adviser, but leverages the connective power of digital communication (e.g., videoconferencing, co-browsing) to deliver this service from a distance.

“Advisers in this model often work with digital platforms (such as those being created by robo-advisers) to simplify parts of the advice process, but they continue to offer the personalized services that customers demand. In other words, the digitization of advice does not mean the automation of advice.”

European banks have pioneered the model alongside their traditional branch-based advisory networks. In the United States, some firms are consolidating clients’ investment assets by adding personal financial advice to their existing direct distribution platforms. In addition, a number of firms without established branch models are also making the leap to virtual advisers.

McKinsey estimates that this business model can result in:

  • Forty to 50 percent reduction in cost with load ratios 70 to 90 percent higher than traditional models.
  • Higher customer satisfaction scores through improved client access, specialization and enhanced training opportunities.
  • Stronger compliance and control as a result of the centralized structure.

And, that in most markets, at least 20 to 30 percent of clients are “likely to subscribe” to the virtual model.

Roboadvice and advice (virtual or traditional) come together

“Whether it’s a fully automated digital wealth manager like Wealthfront or Betterment or an adviser-assisted digital wealth manager like Personal Capital, these are lower cost models than the traditional human adviser. New technology, streamlined platforms and simple products are providing access to advisory services to the mass market for the first time,” Lopez adds.

“The stakes are high—balancing access to advisers and use of robo-advice models. There is the risk of just adding a new channel to an existing model and increasing costs. We believe that winning institutions are going to have to be much more focused on client segmentation, creating end-state models that most resonate with the segments they choose to serve, while carefully managing cost to deliver to avoid cannibalization and margin erosion” says Kellum. “Our research indicates people want access to a financial adviser if they can afford it. The key questions are, what is the role of the financial adviser and how much does it cost? We see a number of potential winning models emerging:

 Segment Investable Assets Example of Innovator Today  Its Approach
 Retail  <$250k  Betterment  


Robo adviser with call center.


 Mass Affluent  $250 – $1MM  Charles Schwab  


FA Navigator (basic) with robo investing tools.


 Affluent  $250k – $3MM Fidelity + Betterment Institutional  


Financial adviser with robo management and reporting for efficiency and third-party advisers.


High Net Worth  >$1 – 2MM Merrill Lynch  


Personal CFO with full platform of products and specialists and robo tools to improve efficiency and effectiveness.


Ultra high- net-worth  >$5MM Northern Trust  

Client relationship quarterback with team of experts (private banking, investment management, trust and estate planning).


“What’s happening is most apparent in the retail, mass affluent and affluent segments. But these approaches will become disruptive in higher net- worth segments as these clients see what is happening around them and expect a similar type of client experience and ease of use,” Kellum adds.

Will this change the investment and wealth management business?

Ernst and Young’s “Advice Goes Virtual” paper predicts that the most likely future scenario is for a broader, larger wealth management market serving clients across multiple segments (from mass market to ultra-high net worth) through fully automated solutions, traditional high-touch advisers, and hybrid versions of the two that combine virtual adviser interaction with automation and self-service technology-based tools.

Ernst and Young’s paper also acknowledges challenges to traditional firms, including:

  • Conflict with financial-adviser-led value network.
  • Limited resources and capital allocation.
  • Pace of innovation.
  • Pressure to bring prices down.

“We’re setting a new bar for the wealth management experience. The change will drive firms to rethink their target, perhaps focusing only on high net- worth and ultra high net-worth. Others will choose to go down market. Independent advisers are already figuring out the benefit of both robo advice models and becoming ‘virtual.’ They’re recognizing how much more efficient they can become. Banks have been reluctant so far. But when the first one takes the leap—others will follow,” concludes Lopez.

“I think these changes present a real opportunity, not a threat for many players,” says Oliver Wyman’s Kellum. “How can you best leverage the new tools to develop compelling affluent and mass affluent offerings? Combine these capabilities with a strong bank brand, and you have the opportunity for a low-cost retail private bank. Many banks’ wealth management groups have not significantly penetrated the mass-affluent segment. This is not cannibalizing a business you already have, it’s a whole new opportunity.”

Betterment: Anatomy of a Digital Disruptor

Part of Betterment’s mission statement says: “We want to democratize financial advice and management. We believe we can deliver personalized, optimal advice which is immediately implementable, and we can manage client portfolios continuously.” And they have ….

Betterment now offers its products directly to consumers and to other financial providers through Betterment Institutional. We spoke to their Director of Communications Joe Ziemer about both offerings and how they are changing the “who” and “how” of the financial advisory business.

How is Betterment changing the market?

Betterment says it is opening up financial advice to a much broader audience than ever before.

  • Pricing is far below customary fee-based advice: 0.15 percent annually for accounts of more than $100,000; 0.25 percent annually for accounts between $10,000 and $100,000; and 0.35 percent for accounts under $10,000 with auto-deposit. We are not collecting additional fees from the client’s investment returns.
  • There are no minimums for Betterment accounts.
  • Tax loss harvesting and tax efficient rebalancing are features that have only been available to very high net-worth clients. At Betterment there are no minimums to receive these benefits.

What do Betterment clients look like?

Betterment has about 110,000 clients with an average age of 36. We are generally targeting the retail segment, investors with less than $500,000 in investable assets. This is often their first advisory relationship although some have been “doing it themselves” through firms like Schwab or ETrade.

Our average age is continuing to climb. Early technology adopters tend to be younger and that was true of our initial customer base. Now customers 50 and older are 25 percent of our business. These new clients have allowed us to extend our offering to specifically address the retirement income segment. We are also helping with decumulation—providing clients with tools to manage monthly spending as well as monthly income. Thirty percent of our 70 year old plus customers are even using the mobile app.

How do investors decide to come to you?

Personal referrals are a key driver in the traditional model.

Are those a major driver for your business as well?

We know that customers are happy with their Betterment relationship. Consumer Reports just rated Betterment customer service in their top 5, joining the ranks of USAA and T. Rowe Price. Referrals are a natural outcome of that level of customer satisfaction. We also attract customers through traditional marketing channels and public relations.

How do customers introduce themselves to Betterment?

Customers often “test drive” our service. This may be with a specific part of their portfolio like an IRA or by setting up a new taxable account.

Do you have a migration path as client’s assets grow and their needs evolve?

We are constantly communicating with our customers to anticipate their future needs. The introduction of retirement income tools and a new 401(k) product for small- and medium-size businesses are examples of that. So we will continue to evolve our offering to best meet the evolving needs of our customers.

Is an adviser important in extending your reach into older age segments?

There are times in clients’ financial lives when they need to talk to a person. Estate planning or insurance planning requires a different level of interaction. During the recent dip in the stock market, customer call volumes were normal.

How have you seen the market change since you’ve entered the business?

When we first launched over five years ago, we were the first robo-adviser. People weren’t exactly sure how they should classify us. Our early customers were what you would expect from early adopters of a new, innovative technology platform. Fast-forward five years later and there is an entire category of robo-advisers that we are leading. We now have more than 100,000 customers and serve a wide variety of clients from 18 years old to the mid 90s.

 Why have banks been so unsuccessful in cross-selling investment products to their existing customers?

There are a lot of things at play. Organizational challenges can be a big factor. Banks need to look at what they’re doing and decide if they’re meeting the market’s current needs. Are you making it simple for the customer to understand and the adviser to sell? Do customers understand how they’re paying for service? Customers have access to more information than ever and are starting to raise their standards in terms of the types of products and services that they expect in financial services. Our growth is a great example of that. There is an appetite for a new financial services company that puts the customer first.

What is the offering in summary?                

Investment advisers can use our technology to better manage their clients’ portfolios.

Can the Betterment institutional product be customized by the bank or other provider?

At the simplest level this is a white label offer—the customer sees the adviser’s branding. In the small print, it does say “powered by Betterment” at the bottom. From a back office perspective, Betterment will handle the whole on-boarding process including your customer agreement and ours. This is a 100 percent paperless experience.

We handle all fee collection and distribution. We handle the customer service for the adviser when it comes to things like password problems and rollover assistance. For the financial advice portion, we direct the customer to their adviser.

There is also the capability to customize the portfolios.

How hard would it be for a bank to implement this offering?

It can be as easy or hard as you want. The institution would need to decide if they want to target a particular segment (mass affluent?). Do they want their advisers to use this or do they want it to be a digital pure play? That’s just a small sample, but the answers to these questions and many others will determine the degree of difficulty—the simpler the initial application, the easier the initial implementation will be. There are, of course, other things to think about, such as how would the bank want to market the offering? How extensively will they need to train staff?

With registered investment adviser (RIAs) gaining market share, are they using this product?

Yes! We currently have over 150 firms using Betterment Institutional. They have found that this product allows them to service many more clients and grow their practices. XY planning is a great example of an independent RIA group combining the Betterment product with their adviser model. Their advisers tend to work remotely and can easily work with customers using video and our platform.

How much latitude does a financial adviser have in using the product?

Advisers can set the allocations or the client can—so you have as much control as you choose.

What have the biggest obstacles been to firms considering your product?

Many firms are used to selling mutual funds as their core product. The introduction of a platform that uses exchange traded funds (ETFs) has been difficult for some to come around to. Many are still assessing the impact of robo-advisers on their current and future business and figuring out their roadmap.

Deb Stewart of Charlotte, N.C., is an independent consultant working for the financial services industry. Email: [email protected]