Implementing a Robo Advisor Strategy

By Peter Jacobstein

Implementing a robo advisor strategy starts with these critical decisions.

Banks of all sizes are waking up to the dramatic growth of robo advisors, with industry leaders aggressively rolling out their own offerings. However, smaller to midsized banks can also get into the game. They can’t afford to ignore what’s arguably an inexorable digital asset management trend.

Robo advisors can complement—not threaten—any bank’s business model and improve customer engagement. According to KPMG’s report, Robo Advising: Catching Up and Getting Ahead, all types of bank customers—including millennials—are interested in a digital investment experience. Regardless of age, income, or gender, 75% of bank customers surveyed by KPMG said they would be likely or somewhat likely to consider a robo advice service from their bank.

Once a bank decides to embrace robo technology, it must decide whether to build, buy, or rent the technology. It’s paramount for a bank to get this right, even for one that partners with a third party to deliver its investment program. A misstep could negatively impact technology budgets, IT development priorities, staff time, and a bank’s reputation. However, choosing the right path could yield a robo advisor that serves customers and cultivates relationships for years to come.

How to get the customer relationship right.

Banks should first determine the type of customer relationship they want to foster. Two options exist:

  • Give customers a seamless robo advisor service using the bank’s brand.
  • Send customers to use a third party—with its own brand—to provide digital financial advice.

Both options give the customer the advantages of a digital experience supplemented by personal advice. Yet, the first option keeps customers closer to the bank while the second puts space in the relationship.

Another critical component of a robo strategy is defining the relationship customers will have with the bank’s human advisors, if they are already in place. Some institutions choose to use digital financial advice as an online standalone experience for customers. Others give financial advisors the ability to work with customers in setting up and managing the digital advice account.

Defining the customer relationship doesn’t have to end here. A bank could also consider the types of securities—stock, mutual funds, ETFs— that will be available, as well as the options that will give customers a diversified, tax efficient portfolio. Using an investor questionnaire can help determine the appropriate portfolio asset mix, as well as a customer’s risk tolerance and investing knowledge.

A bank should also think about the business and legal structure of its robo advisor against the desired type of customer relationship. A bank will have different legal and regulatory obligations depending on whether it keeps the service in-house or outsources it to a third party. Importantly, banks will have to determine how the Department of Labor’s fiduciary duty rule applies to their robo service.

How to choose among the four robo technology options.

The technology choices for a robo service can be confusing. However, when a bank knows the type of customer relationship it wants, selecting a back-end platform becomes easier. The key is finding a flexible solution that can adapt to future growth and customers’ needs.

Here are the pros and cons of four technology options:

1. Build a robo advisor from scratch.

  • Pros: Offers complete customization and maximum control over the robo advisor’s functionality.
  • Cons: It is costly and requires IT infrastructure and ongoing maintenance that many small to midsized banks lack.

2. Build a robo advisor front-end and use APIs to tie into an existing broker-dealer or technology provider.

  • Pros: A bank can remain in charge of the robo advisor’s look and feel and most of the customer experience.
  • Cons: Banks still need IT expertise to build the front-end web site and integrate it with brokerage APIs. However, this is a less expensive option than building the product from scratch.

3. Apply a “custom-build solution,” partnering with a broker-dealer or technology provider that provides customizable front-end and back-end brokerage, custody and/or investment management service.

  • Pros: Provides significant control of front-end functionality, speeds up implementation time and reduces IT costs. Banks will work with a partner that can provide three critical components to all robo advisors: brokerage features, a diverse investment program, and a digital front end. Also, banks can more easily incorporate new features as they become available and not worry about how to “bolt on” the latest technology.
  • Cons: Full branding can be an option, but control of front-end functionality may be limited—unless the bank involves itself in design and implementation.

4. Partner with a third party to provide the digital investment program, sending customers from the bank to the robo advisor.

  • Pros: Requires the least amount of work and cost. May shift some regulatory responsibilities from the bank to the third party.
  • Cons: Puts distance between the bank and its customers. Also, the bank forfeits control over customer service and any organic business growth.

Robo asset management can be a component of every bank’s business model. Industry research confirms that there is growing customer demand. No matter what type of robo advisor a bank chooses, it should take the time to thoroughly analyze what its customers need today and in the future. The payoff: a positive reputation that differentiates a bank from the competition.

Peter Jacobstein is senior vice president of Folio Investing®, which provides integrated brokerage and online investing technology to banks, credit unions and financial advisors. It also serves self-directed investors with innovative, online brokerage services. Folio Investing is offered by Folio Investments, Inc., a self-clearing broker-dealer. Email: [email protected].