By Kapin Vora and Tobias Henry
While debate surrounding the role of technology in wealth management has traditionally pitted man against machine, as investors begin adopting new technology, a third option has since emerged: the hybrid advisor model.
Combining the best aspects of both a traditional, advisor-driven offering with the efficiency and accessibility of automated digital platforms, this more “bionic” approach to wealth management is quickly changing client expectations. But what does a successful hybrid model look like?
In its simplest form, the hybrid approach incorporates the best components of human-based financial advice. But the level of human service is underpinned by a far more flexible business model—enabled by technology—that can support customers throughout their financial lives, spanning from mass market, middle- or lower-income clients to ultra-high-net-worth investors. The level of human interaction, product complexity, fees and accounts offered can change depending on client demographics.
Managing investments in this way, including using automated technology, enables advisors to grow their existing business by focusing on financial planning and customer relationships, while scaling their business to serve a larger customer base. Advisors can engage customers at a younger age and continue to provide cost-effective services to them as they move through different stages of life. Digital capabilities also dramatically enhance advisor’s value proposition by improving communication through both mobile applications and on-demand access to portfolio performance.
The hybrid model facilitates clients’ growing expectations that finances should be no less accessible than, say, finding the daily news headlines. This increased connectivity has the added benefit of encouraging more frequent interactions between clients and their advisors, even if they’re automated, which ultimately strengthens the relationship and helps build trust. Moreover, consolidating financial information onto one central platform allows clients to plan and monitor portfolios across all accounts, products and investment solutions, and access this information as needed. A more flexible business model also yields greater elasticity in fee structures, allowing clients to pay for the exact level of service they choose.
Multiple hybrid business models enable advisors to efficiently offer services based on customer segment and complexity of financial need. And variations can be segmented into categories, such as: “digital advisor,” “scalable advisor,” and “high-touch advisor.”
Digital advisor model
For a traditional middle-income retail investor, value is typically driven by the simplicity of the service model and their ability to have straightforward interactions with their advisor. Northwestern Mutual reported a few years ago that roughly one-third of Americans do not even have a financial plan, suggesting that the problem lies not in a shortage of tools, but rather the ability to use them. For this audience, the “digital-advisor” model does well to target mass market investors seeking affordability paired with quality financial services.
In the “digital advisor” model, human advisors only provide initial guidance and setup, after which a digital platform takes over for onboarding, omnichannel-portfolio access, account funding, model generation, investment management and rebalancing. Given their ability to easily serve a large customer base, investment products offered in this model are quite like those historically offered to the mass market, such as exchange traded funds, target-date funds, and cash management. The benefit from the perspective of both wealth managers and their clients is that the digital advisor model allows investors to seamlessly graduate to scalable or high-touch service levels as their assets grow or needs become more complex.
Scalable advisor model
The “scalable advisor” model allows both robo and traditional advisors to serve mass affluent clients in an efficient and cost-effective manner. With the scalable model, advisors provide a more active role in investment decisions and help manage complex financial instruments in a client’s portfolio. Investors, therefore, receive both an enhanced digital experience and full-scale advisor services.
Many say that once an investor accumulates enough wealth to be considered an ultra-high-net-worth client, the role of digital capabilities begins to wane. However, the reality is that over 60 percent of UHNW individuals are under 45 years of age. Moreover, as investors grow assets and play a more active role in allocating their investments, they tend to monitor performance that much more closely. In a digital world, investors simply expect access and answers to complex questions anytime and anywhere.
High-touch advisor model
A “high-touch advisor” service model is specifically designed to provide investors who have complex financial needs with a tailored experience. Advisors not only encompass the traditional offerings of lower-tier services, but provide clients with personalized assistance on financial, retirement and estate planning.
Product scope for high-touch advisors is expanded to include real estate, annuities and alternative investments, among other, more exotic asset classes. Advisor-client interaction, as a result, often requires a much higher frequency of in-person meetings to establish trust and comprehensively articulate the client’s financial picture. But in these cases too, digital capabilities can help streamline more intensive reporting demands or help advisors model out customized asset allocation strategies bespoke to each client.
Why the hybrid model is here to stay
Regardless of the variation, the hybrid model has inherent benefits that span all parties, making it attractive and mutually beneficial for financial advisors, businesses and clients. The greatest benefit of the hybrid approach is that it increases the scalability of financial advisors, allowing them to serve more clients while maintaining a high quality of service.
The digital platform also acts as a catalyst for driving business growth through the acquisition of new customers and, subsequently, new assets. For example, a digital offering provides a low-cost feeder channel to attract younger customers, who may be just entering the workforce but have tremendous earnings potential and are positioned to assume additional assets through the transfer of wealth from one generation to the next.
The most material benefit of the hybrid approach is that it allows clients to choose their level of human and digital interactions—from the level of advice received and product access to greater flexibility around fee structure and preferences around the digital experience.
The robo-advisor’s advance into wealth management has forced the industry to rethink client interactions. In the future, advisors should expect the hybrid model to continually evolve to meet the changing needs of investors, who simply expect technology to play a greater role in their lives day by day.
Kapin Vora is a partner and head of wealth management and digital North America at Capco, a global management and technology consultancy dedicated to the financial services industry. Tobias Henry is a managing principal and head of digital wealth North America at Capco.