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The Hybrid-Robo Conundrum

How do firms incorporate a digital advice platform without jeopardizing their current business model?

Many in the industry believe a major trend of 2017 will be widespread adoption of digital advice by traditional wealth management firms. No longer seen as a threat, advisors now see robo advice as a way to address new regulations, appeal to changing consumer tastes, and capture some of the assets in the underserved mass affluent market.

Firms still face a quandary when it comes to incorporating robo advice into their practice. How exactly do they implement these products without threatening the existing business model or demoralizing human employees?

According to Barbara Wall, the European managing director at research and consulting firm Cerulli Associates, firms must tread cautiously to avoid jeopardizing advisors’ ability to meet sales goals.

“Firms need to carefully craft their digital solution’s positioning and service model, pricing and underlying investment products,” Wall said in a recent Cerulli report.

Cerulli’s survey of executives at managed account firms found that only 16.7 percent think clients should be told that they would get less interaction with a human advisor through the robo offering. Cerulli warns that if firms instead expect advisors to support low-price clients the same as higher-priced clients, they’re in danger of eroding their business model.

One possible solution is to just price a digital offering the same as a traditional offering, but most of the managed account sponsors disagreed with this approach. The consensus (76 percent) is that the price of digital advice should be somewhere in the range of 25 and 75 basis points—less than what most advisors charge.

Cerulli agrees that digital advice should cost less than traditional services, but not as low as the digital-only startups, which stick to the 25 to 35 bps range. The ability to connect with a human advisor is valuable, and pricing should reflect that.

The challenge then becomes how to upsell clients from the robo service as their assets grow and needs get more complex, and the industry seems split on the solution. Half of the managed account sponsors said digital advice should be “part of a continuum of advised offerings” like what Vanguard is doing with Personal Advisor Services, while 30 percent should be branded to distinguish it from the traditional offering like Schwab is doing with its robo products.

Whatever strategy a firm chooses, Cerulli says firms have to clearly communicate to digital clients what kind of service they are providing to them and determine how advisors can handle it without neglecting higher-touch clients.

To successfully integrate digital advice, the price differentiation between a digital offering and a traditional service can’t be so large that it will discourage clients from making the jump. Firms must be able to clarify the service differential between the two products, and must ensure that the human-advisor relationship provides significant added value.



TAGS: Industry
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