Celent’s Innovation and Insight Day: Wealth and Asset Management Stream

Celent’s Innovation and Insight Day: Wealth and Asset Management Stream

We are only weeks away from Celent's 2017 Innovation and Insight Day where we will explore how players in the financial services market are leveraging technology in innovative ways in order to differentiate themselves in an increasingly competitive and challenging marketplace. We will be featuring a number of case studies, discussions, and deep-dives into topic areas surrounding innovation and focusing on themes, such as:

  • Customer Experience
  • Products
  • Emerging Innovation
  • Operation and Risk
  • Legacy Transformation

This is the first year we will have a Wealth and Asset Management (WAM) breakout session where we will cover a range of topics around innovative solutions and trends in WAM.  The agenda can be found here: Wealth and Asset Management (WAM) Program and will be presented by analysts from the Celent Securities & Investments and Wealth & Asset Management teams:

  • David Easthope, Senior Vice President, Securities & Investments
  • Brad Bailey, Research Director, Securities & Investments
  • Kelley Byrnes, Analyst, Wealth & Asset Management
  • John Dwyer, Senior Analyst, Securities & Investments
  • Ashley Globerman, Analyst, Wealth & Asset Management
  • Arin Ray, Analyst, Securities & Investments
  • William Trout, Senior Analyst, Wealth Management
  • James Wolstenholme, Senior Analyst, Wealth & Asset Management

I particularly look forward to sharing research around the evolving wealth management landscape as the core client base shifts from baby boomers to millennials. While much ground has been covered from the perspective of wealth managers to meet the digital needs of nextgen clients, wealth managers continue to be behind the curve in their digital offerings.

How are wealth managers and vendors responding to the paradigm shift in the development and execution of services and products to meet millennials’ distinct expectations?

This is just one example of the many topics that we will discuss at I&I day – we hope to see you there!

 

Impact Investing Gains Momentum

Impact Investing Gains Momentum

The polarizing political climate appears to be serving as an impetus for some firms to take socially responsible investing more seriously.  At today’s Impact Investing conference hosted by The Economist in NYC, Audrey Choi, Chief Executive of Morgan Stanley’s Institute for Sustainable Investing, said there is research that shows that 70% of investors want to align their investments with their values.

Not surprisingly millennials are interested in impact investing. Audrey Choi also referenced research that that millennials are two times as likely to buy or divest stocks based on their personal beliefs.

Most speakers throughout the day were aligned in that they wanted to see impact investing become more than just a sleeve of an investor’s portfolio; impact investing should be mainstream as suggested by the full name of the conference, “Impact Investing: Mainstreaming purpose driven finance.”  Jackie VanderBurg, Managing Director and Investment Strategist of US Trust and co-author of “Gender Lens Investing: Uncovering Opportunities for Growth, Returns and Impact,” explained that gender lens investing, like other responsible investing should not operate in a silo.

Another common theme throughout the conference was that impact investing is smart investing. Understanding sustainability and opening one’s eyes to the different geo-political risks that face our world, is wise and exposes a company to less risk. For example, Audrey Choi, shared a statistic from the Sustainability Accounting Standards Board (SASB), which found that 93% of companies stand to be impacted by climate change or the need to defend against it, but only 12% of companies are disclosing the risk.

A roadblock in the world of socially responsible investing is proving to investors that they do not have to compromise return when investing according to their beliefs.  As Jackie VanderBurg said in reference to gender lens investing, “Gender lens investing is not small, soft and pink. It is smart investing. Gender lens investing is the deliberate, intentional integration of gender-based data into financial analysis with the expectation of finding additional opportunities and mitigating risk”.  Money managers and personal investors must apply the same rigorous process to impact investments as they would with any type of investment. 

Joshua Levin, co-founder and Chief Strategy Officer of OpenInvest, a robo-advisory that permits clients to choose investments supported by their personal beliefs, brought up another challenge: intermediaries. He gave the example that when people first started out investing, people invested to have an impact; that impact may have been to start a factory or own part of a company to influence a company’s decisions. Now with so many intermediaries, investors no longer think of investments as having an impact. Now people invest for diversification.  With a platform like OpenInvest, people can have an impact by choosing not to invest in a company if the company is not aligned with their personal beliefs. 

Many speakers were also in agreement on other challenges facing impact investing: reliable metrics, more products across asset classes, and more education for consumers and advisors alike.  After attending this conference, I am hopeful that firms are working to address the roadblocks to impact investing. While perfect solutions may not be possible this should not impede the value that can be added from investing in a socially responsible way.

No lumber, no slumber: Canadian robo steps up

No lumber, no slumber: Canadian robo steps up

As I point out in my recent report on robo advisors in Canada, price points for digital advisors are on the high side, even for the lumbering Canadian advice market. Especially as these robos are not known for standout service, as other bloggers have noted.

So should it be a surprise that Invesco Canada has developed plans to roll out Jemstep in Canada, the digital advice service the parent company acquired in January 2016?

Opportunity beckons

The truth is that the roll out has relatively little to do with the small Canadian market, and everything to do with the US, and eventually, the UK, markets. Invesco has been digesting Jemstep for more than a year now, quietly making Jemstep’s robust aggregation and client servicing functions available to those advisors who want them.

Fine tuning is fine, but at some point, it’s time to go big. With prices for robo tech on the wane, there is pressure on Invesco top brass to make something of this acquisition. Indeed, Peter Intragli, CEO of Invesco Canada and head of North American distribution, signaled this launch a while back. It is also worth noting that stand alone Canadian robo WealthSimple is taking a similar tack to Invesco, launching in the US and hiring London based consultants to guide its UK entrance. I’ll talk more about the thinking behind both firms' move in a later post.

In the world of robo 2017, C.A.S.H. is king

In the world of robo 2017, C.A.S.H. is king
For those of you who seek yearly prognostication, here we go. I see four factors or trends driving the evolution of robo world in 2017, and attempt to capture them here with a simple, suitable acronym: C.A.S.H.
  • Cross border activity: We’re now seeing robo advisors extend their reach across national borders. This is not just the case in Europe (think German-UK robo Scalable and Italy’s Moneyfarm, which launched in the UK) but in North America as well. I comment on the planned entrance of Toronto based robo Wealthsimple into the US market in Financial Planning.
  • Asset managers will continue to seek distribution, launching robo advisory platforms that enable the advisor to market their products. They’ll also want a share of advisor profits.
  • Synergies with CRM, compliance and other tech providers will deepen, as robos become more tightly integrated into the wealth management ecosystem. It’s no coincidence that two of the portfolio optimization software providers featured in my last report offer robo advisory platforms.
  • Hedge fund-like robos will prosper in an more volatile economic environment. These robos will use passive instruments to take a position on the market, and in some cases, allow users to “steer” (or apply their own views to) investment decisions.
Taken together, these trends signal the “mainstreaming” of robo advisory capabilities. Robo advice platforms are now less a “nice to have” than a core part of the incumbent advice offer. As such, these platforms are becoming increasingly bound up in the larger industry infrastructure. Those robos that seek to keep themselves distant or apart from this ecosystem will find themselves exposed, and short of cash, once the current funding cycle dries up.

Wells Fargo rides herd on DoL

Wells Fargo rides herd on DoL

It’s no coincidence that Merrill Lynch launched its new robo platform the same week it decided to exclude commission based product from IRAs. Likewise, the decision by Wells Fargo to announce a robo partnership with SigFig suggests that despite the pronouncements of pundits and industry lobbyists, DOL is hardly DOA.

It takes a brave man to guess how the Trump administration will balance populist tendencies with free market rhetoric. In this case, as I note in a previous post, the inauguration of the new president precedes DoL implementation by less than three months. The regulatory ship has left port, and in any event, it's not clear that President Trump will want to spend valuable political capital undoing DoL.

I’ll discuss Wells Fargo’s motivations in a later post. For now, I’ll note the degree to which a robo offer aligns well with the principles of transparency, low cost and accessibility at the heart of DoL. At the same time, I caution the reader to consider the challenges that any bank faces in rolling out a robo platform, a few of which I underscore in this column by Financial Planning’s Suleman Din.

Introducing The Cognitive Advisor

Introducing The Cognitive Advisor

Last week I published a report on a topic that has interested me for some time: the application of artificial intelligence (AI) technology to the wealth management business. To date, neither Celent nor its industry peers have written much about this topic, despite clear benefits related to advisor learning and discovery. This lack of commentary, and the industry skepticism that underlines it, reflects successive waves of disappointment around AI, and more recently, competition for research bandwidth from other areas of digital disruption, such as robo advice.

Another inhibition relates to taking on an industry shibboleth. How to reconcile AI or machine intelligence to the hands on, high touch nature of traditional wealth management? This challenge is real but overstated, even when one reaches the $1 million asset level that has defined the high net worth investor. Indeed, the extent to which wealth management is a technology laggard (in general, but also when compared to other financial services verticals) highlights the opportunity for disruption.

In particular, AI offers a means to circumvent the dead weight of restrictions presented by antiquated trust platforms and other legacy tech, a weight which reinforces advisor dependence on spreadsheets and other negative behaviors. As is set out in the report, it is precisely the combination of new behaviors and technologies that can help surmount the finite capabilities of the human advisor.

Guidance, not advice

Guidance, not advice

Last week Merrill Lynch announced the launch of its long awaited Guided Investing robo advisory platform. Investors get access to a fully automated managed account for only $5,000, compared to the $20,000 required for call center driven Merrill Edge.

A new type of hybrid model

It’s interesting that Merrill Lynch would launch another managed account platform at this point, given the narrow gap between the two program minimums. But industry wide fee compression underscores the importance of cost savings, and with Merrill Edge’s best growth behind it, even a call center is expensive compared to a digital first approach.

I say “digital first” because Guided Investing clients can still get access to a human advisor. In this case, however, the advisor delivers (in the words of a Merrill spokesman) “guidance” and “education”, and not investment advice. Advisors are able to explain product choice as well as why and how a portfolio is rebalanced, for example. Such capabilities reinforce the Merrill message that its portfolio models are not just algo driven, but managed by the CIO.

Compliance friendly

The compliance friendly terms “guidance” and “education” give another clue to Merrill’s intentions. Like BlackRock and other asset managers discussed in my previous post, Merrill wants to get ahead of the DoL rule and fill the advice gap that will be left by the rollout of a uniform fiduciary standard across both the qualified (retirement) and taxable investment spaces. It’s worth pointing out that Merrill announced its decision to stop selling commission based IRA accounts the same week it launched Guided Investing.

Compliance and economics are powerful (and mutually reinforcing) motivations. Especially when the economics are not just about cost savings, but about the chance to develop a whole new client segment. Guided Investing represents not just another robo platform, in short, but an effort to lower delivery costs and fill out the range of options Merrill offers clients, particularly younger and self-directed ones.

Merrill believes (correctly, in my view) that this type of managed investment solution will be as ubiquitous as mutual funds within five years, and so it has no choice but to move forward. Vanguard finds itself at the same crossroads, which is why the firm’s plan to launch a fully automated robo platform (as a complement to its $40 billion AUM Personal Advisory Services hybrid program) is probably the industry’s worst kept secret.

 

Shining light on the thinking at BlackRock

Shining light on the thinking at BlackRock

It’s clear that there’s more than a little chutzpah behind BlackRock’s demand for tougher regulatory oversight of robo advisors. This post probes the thinking behind it.

Does BlackRock, with FutureAdvisor in hand, want to shut the door on new robo entrants? A desire to forestall such competition would suggest a level of fear that I do not think exists. (Among other things, the robo narrative has moved past the independent or 1.0 stage). BlackRock’s main concern seems to be that the sloppy hands of existing competitors might result in regulatory sanction on everyone, and so put the hegemony enjoyed by BlackRock and its asset manager competitors at risk.

Neither faster, nor better, nor cheaper

While BlackRock may have paid $150 million for FutureAdvisor, I don’t think the firm believes it owns a better mousetrap. FutureAdvisor may have an innovative glide path feature (which may explain why FutureAdvisor has an older clientele than its robo competitors), but tax loss harvesting, 401(k) advice, “try before you buy” functionality and other core capabilities have become table stakes in robo world. If anything, BlackRock may believe that its proprietary ETFs (characterized by low tracking error and a broad product base, e.g., Japanese fixed income) outshine the plain vanilla offerings of Schwab and Vanguard, although this argument is undercut somewhat by the firm’s recent decision to drop fees.

Asset managers in the catbird seat  

Like the ETF business, robo advisory services have become increasingly commoditized, even as the DoL conflict of interest rule presents a massive tailwind for both. It’s a tricky time for asset managers seeking to shift their offer from manufactured product to advice based solutions.  BlackRock appears to feel it is in the catbird seat, and is perfectly happy to secure its hand and that of its asset manager competitors, all of whom have done well by automating their investments platforms. I’m not saying there’s collusion here, just a noteworthy confluence of interests.  

I’ll talk about the motivations behind the launch of another asset manager-backed robo in my next post.

The Big Bad Robo Halt

The Big Bad Robo Halt

Let’s pause. Take a break. No, the big bad robo halt isn’t the Betterment Brexit brouhaha I discussed in the WSJ last week. It relates to the degree to which the hype around robo has dwindled.

As detailed in last week’s webinar, robos’ ability to automate previously high touch advisory functions is proving their comeuppance, at least in startup world. The commoditization of the portfolio management process, from asset allocation to rebalancing to tax loss harvesting, works in favor of the large incumbents, with their advantages of brand and scale.

Meanwhile, product innovation efforts by independents as described in my Robo 3.0 report have gained little traction. While the robo value proposition (centering on transparency, cost, and user experience) broached by first movers Wealthfront and Betterment and others remains very much in play, incumbents have co-opted the vision.

We're not yet at the point of a fire sale, but the price tag for independent robos is shrinking fast. This is a question of deployment as well as value; among other things, it's become apparent that putting into action a store bought robo is not as simple as plug and play. I'll discuss the robo world challenges facing asset managers, banks and other incumbents in my next post.

Canada: When Investors Lose Patience, Advisors Lose Assets

Canada: When Investors Lose Patience, Advisors Lose Assets

Growing interest in robo advice among Canadian investors reflects the dearth of advice offered by incumbents more than any real threat from startups. The independent robo community in Canada, split between the traditional financial services hub of Toronto and fintechy Vancouver, is fragmented and small; there is no Canadian Betterment. And so, with a few exceptions, banks and other providers of wealth management services in Canada have felt little need to undermine their fat margins by rolling out digital advice channels.

This may prove a mistake. A recent JD Power survey of Canadian investors showed that few felt that their financial advisors provided much in the way advice. Roughly half of those surveyed felt their advisors helped them set goals; only a third believed that their advisors were helping them follow a strategy. This skepticism begs the question, what are these advisors providing?

If it’s just portfolio management, there’s a real opportunity for the robos, particularly given the fee transparency enforced by CRM2 regulation. If it’s portfolio management plus service and coaching, there’s still an opportunity to undercut the high fees charged by advisors. Indeed, the JD Power survey found that nearly half of Millennial investors in Canada would consider using a robo type solution, versus 30% of all investors. These levels may seem low compared to the US, but as I discuss in my Thawing Market: The Growth of Robo Advice in Canada report published last spring, robo advice in Canada only dates back to 2014.

A revolution starts with just a few voices. Once the crowds have gathered, it’s often too late to respond. Canadian banks and advisory firms must find ways to roll out low cost digital advice channels, or else risk losing a generation of investors. These roll outs needn’t be cumbersome or expensive. I’ll discuss some quick and painless ways firms can get up and running in my webinar on robo this Thursday.