A mid-pandemic pulse check on digital investment management found that lockdowns and pandemic investing behavior benefited digital platforms, particularly larger ones run by incumbent wealth management firms, according to an Aite Group report. While concerns about platform viability grew as the market dropped, automation and scalability may have saved the day. For the most part, firms were able to manage increased call volume and trading activity, aided by platforms’ self-service models and goals-based planning strategies.
Startups dependent on AUM fees faced a reckoning last month: twin headwinds of a down market and a decrease in venture capital funding threatened business viability, noted the report’s authors. But the firms Aite looked at were generally able to manage the crisis’s challenges, in no small part because of having systems that required little human interaction for processes like client onboarding, portfolio rebalancing and client services—some of the same friction points encountered by human advisors.
In fact, new account growth increased, with larger platforms seeing the largest increases in account growth. The rate of new account openings grew by between 50% and 300% in Q1 2020 versus Q4 2019 across the five sample firms Aite surveyed, with client account growth concentrated among firms that are “well-known” and that have existing client relationships, in the form of bank accounts and self-directed brokerage accounts.
The caveat to account growth is twofold, however.
Aite gives a nod to 11 firms in the report, Acorns, Betterment, Charles Schwab, Fidelity, JPMorgan Chase, Morgan Stanley, Motif, Principal Financial, Robinhood, Stash and Vanguard, but interviewed only five of the firms. All five remain unnamed in the report; however, but the report’s authors, Aite researchers Eric Sandrib and Alois Pirker, stated that the unnamed firms were selected “to obtain a broad industry view.” The report also relied on “secondary research” that came from material like briefings, demonstrations and regulatory filings, but it didn’t focus on any particular size of firm or representative sample in that research.
Moreover, “digital offerings attract millennial investors more than other generations,” said Sandrib. So while the report isn’t explicitly focused on millennial investors’ behavior, it’s “tilted” towards millennials, he said.
Investors opening new accounts tended to be “in the millennial age bracket,” according to the report. It’s a cohort that’s proven to be more comfortable with digital wealth management in general, said Sandrib. While they were moving to enter the market, those investors behaved more conservatively: In addition to choosing passive investing techniques, they made investments that skewed more toward fixed income products, he said.
In a nod to the strengths of goal-based planning, the report also stated that platforms with a financial planning approach that's based on financial goals “are seeing more advantageous outcomes during these times.”
“Clients are less anxious and better prepared to handle market volatility rationally during these times, compared to those using an investing-first framework—in which financial planning is secondary—or those with a focus on investing only,” the report noted. It’s the difference between a client just “checking in” and a client upending an entire process. The goals-based planning approach meant a smaller operational burden for firms employing the methodology.
While not included in the report, the pandemic tended to weigh on hybrid firms differently than purely digital offerings, said Sandrib, and that may have technological consequences down the road. Whether those hybrids experienced scheduling capacity constraints or overloaded call centers, the takeaway is that hybrid offerings have a harder time ramping up staff quickly for a one-time event. To combat those challenges, hybrids of the future will need to rely more on technology that automates and moves requests into a self-service queue, like a sophisticated chatbot; or that is able to provide human advisors with even more granular details of a client request, through improved natural language processing, he said.
Even today, there is still uncertainty around the economic situation, which continues to weigh on digital investment management. Nevertheless, certain consequences of the past few months are coming into better focus. Goal-based planning has proved not just psychologically and financially beneficial for clients, but it lends operational advantages to firms. Automation and scalability in certain processes are not just acceptable for clients, they are sought out. Additionally, while startups may generate attention for innovation, incumbents still have irresistible staying power in times of crisis.