Digital advice wars: robos vs. cyborgs

November 2016

Digital Strategy 2.0 — Robos vs. Cyborgs

Who will win the war for digital advice?

– 1 – © Cambrian Consulting Draft: for discussion purposes only

Digital Strategy 2.0 — Executive Summary

We believe wealth management services will follow a similar trajectory to the tax-prep market, where the majority of high-income filers still use a trusted advisor.

The winner between human (traditional advisor) and machine (robo advisor) will be a combination of both (cyborg).

Goals-based financial planning will become the central core capability for advisors to integrate across households, life events, assets, liabilities, taxes and cashflows.

Cambrian can help you define your Digital Strategy 2.0 — from market positioning to value proposition; from financial planning architecture to implementation management.

Robo advisors are already facing strong competitive, client-acquisition and regulatory headwinds.

Most robo advisors offer simplistic solutions for asset allocation, but fail to provide holistic financial advice integrating mortgage, credit debt, insurance, social security, college savings or taxation affects.

The Empire strikes back: established players have moved quickly to implement their own robo innovations (online account opening, rebalancing, account aggregation, mobile access, etc.).

Robo advisors, such as Betterment and Wealthfront, are attempting to disrupt the traditional wealth management firms with lower costs and innovative technology.

Robos have two choices: compete directly against retail giants or become B2B platforms.


Disruptive Technology Upstarts?

•  Clay Christensen details the way successful companies focus on their customer’s current needs but still lose dominance in their core markets.

•  New entrants, with nothing to lose, adopt new technologies and innovate quickly starting with simple products that can quickly scale-up, e.g.: steel mini-mills, PCs, earth movers, computer chips.

•  Their nimbleness and low-cost structures allow them to operate profitably where well-entrenched incumbents cannot compete.

•  Christensen’s examples clearly work for product-based industries, where innovations allow low-cost providers to quickly enter commoditized markets.

The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail.

•  Robo Advisors are currently attempting to disrupt the traditional, large wealth management firms with lower costs and innovative technology.

•  But services-based industries, where human advice is highly valued, present a very different challenge to typical industries analyzed by Christensen.

•  Complex advisory markets may not be so easily disrupted by these new entrants.

Who will win the war for digital advice?

Product companies Service companies

Vs.


Robo Advisors Provide Little Real Advice

Most robo advisors provide basic solutions for asset allocation, but fail to offer holistic advice integrating mortgages, credit cards, insurance, social security, retirement, college savings or taxation implications.

•  Should I file and suspend when I hit my age of eligibility ?

•  Should I roll-over my 401K?

•  Should I open a 529 college account?

Under the proposed Department of Labor (DOL) fiduciary rule, advisory firms (including robo RIAs) must consider the “investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor.”

•  Should I buy term or whole-life insurance ?

•  Should I remortgage my house or take a HELOC ?

•  Should I pay off my credit cards or invest in bonds?

?


Robo Headwinds

Robos are already facing strong competitive, client-acquisition and regulatory headwinds.

Contrary to normal disrupter dynamics, the average contribution per user (ARCU) for B2C robos is shrinking, making it difficult to scale up profitably.

Competitive Dynamics

•  Most older customers already have too many investment accounts

•  Millennials have fewer assets

•  Simple ETF portfolios are available at bigger firms at lower costs

•  Robo rebalancing services have quickly become commoditized

Client Acquisition & Value Proposition

•  Client acquisition costs are $300-1,000 per new account

•  Other robo services such as account aggregation are already offered by mainstream providers

•  Tax-loss harvesting is not a big advantage for clients with few assets and a low tax bracket

Regulatory Threats

•  Apart from a simple questionnaire, very little goals-based wealth planning is performed

•  The robo “no-touch/low-touch” engagement model has been challenged by some state regulators where a fiduciary duty of care needs to be demonstrated


Will Robo Advisors Become “TurboTaxed”?

We believe wealth management services will follow a similar trajectory to the tax-prep market, where the majority of high-income filers still use a trusted advisor.

Pure digital, e.g. IRS-Free file, H&R, TuboTax

(38%)

IRS paper forms (9%)

Local accountant, e.g.

a CPA firm (31%)

Trusted friend/family member

(12%)

Bricks-and-mortar firm, e.g.

H&R Block ( 9%)

Source: Go Banking Rates Survey January Experian Simmons (2016)

Since TurboTax was launched in 1993 it as captured ~20% of the overall tax prep market but is now under threat from free solutions offered by the IRS and greater pressure from H&R block and other digital competitors offering simpler tax-prep solutions.

The vast majority of households with income over $200k a year still use a trusted local CPA/advisor. These are the same HNW households that robos may find difficulty penetrating.

Traditional tax planning firms automated many of their own processes to compete with TurboTax using a “man+machine” business model.


The Empire Strikes Back

Industry developments during 2015-16: •  Charles Schwab launched Schwab

Intelligent Portfolios •  Vanguard debuted Vanguard Personal

Advisor Services (VPAS) •  Northwestern Mutual acquired

LearnVest •  Interactive Brokers purchased

Covestor •  John Hancock bought Guide Financial •  Invesco acquired JemStep •  BlackRock acquired FutureAdvisor •  Merrill Lynch and Morgan Stanley

announced they would build their own robo platforms

•  UBS teamed with SigFig to build their robo solution

•  Fidelity launched GO - their own robo advisor platform

•  WisdomTree invests $40m in Vanare

Established retail firms, such as Schwab and Vanguard, have moved quickly to implement their own robo platforms with online account opening, rebalancing, digital signatures and mobile access.

Source: SEC ADV filings and Investment News

Leveraging their scale, brand and distribution, established firms have dominated growth in this crowded market. In one year Vanguard took on more robo assets than all the other robos combined.


B2C or B2B: That is the Robo Question?

B2C robos are subscale players

competing against fully scaled ‘nearly

free’ custodial platforms like

Schwab, TD and Fidelity

Wire-houses are focused on millionaires and service lower-end accounts through call centers and their own robo-style offerings

Private bankers focus on the UHNW segment using sophisticated tax, investing and estate planning solutions

Established mass-affluent players have

launched similar robo-style offerings

at much lower costs.

Self-Directed

Wealth Management Offerings

Mass Affluent HNW UHNW

Scal

e

B2C?

Robos have two choices: compete against retail giants or become B2B platforms.

B2B?

Robo advisers underestimate the cost and complexity of the B2B market: integrating to legacy account-opening, bookkeeping, rebalancing, compliance, reporting and risk processes is very difficult.


Cyborg = Robo + Private Banker

“The family trusted advisor”

High Net Worth

RIA Fiduciary (series 66)

“The fiduciary”

Financial planning & managed accounts

Family Office

Private Banker

Banking, tax & trust services

Millennials

Robo algorithms & technology

Limited product shelf

“Self-service robo model”

The future advisory model will combine the best of all four current approaches.

Mass Affluent

Comprehensive product choice

Wire-House broker (series 7)

“The product distributor”

The winner between human (traditional advisor) and machine (robo advisor) will be a combination of both (cyborg)

Targ

et

Mar

ket

Advi

sor

Cont

act

Prod

uct

Plat

form


Customer Engagement & Holistic Financial Planning

Firms that can wrap (at scale) the comprehensive services of a private banker with the advanced technologies of a robo will form the next generation of wealth advisors.

Holistic Products •  Complete shelf of investment, insurance

and banking products •  Educational-retirement solutions •  Trust and estate planning •  Asset-liability management •  Concentrated/hedging solutions

Advanced Technology •  Biometric access •  Web-based workflow & digital

signatures •  Customer collaboration •  Mobile delivery •  AI/machine learning •  Account aggregation

Data & Analytics •  Product, client, household and

channel profitability •  Client and channel metrics •  Risk and research analytics •  Real-time compliance checking

and post-trade metrics •  Goal achievement metrics

Customer Engagement & Financial Planning

•  Digital financial planning,

including goals-based and cash-flow methods

•  Predictive analytics for life events: college, births, deaths

•  Integrated communications/CRM

•  Multi-channel delivery (including live video, chat, text)

•  Digital marketing and client behavioral tracking

Advisor-Branch-HQ Integration

•  Multi-channel integration (web-call center-branch-FA-CSS)

•  Business, product, client and channel profitability metrics

Goals-based financial planning will become the central core capability for advisors to integrate across households, life events, assets, liabilities, taxes and cash-flows


Implementing a Cyborg Strategy

?

Cambrian Consulting can help you accelerate your Cyborg Strategy

Our Cyborg assessments take ~10 weeks and provide actionable ideas which will help you make decisions on legacy investments and the implementation of new digital capabilities.


Cambrian Consulting’s project credentials, technology vendor map and partnerships


Wealth Management & Digital Strategy Credentials

We have established a successful track record of business-critical change across multiple disciplines for leading wealth management and asset management firms.

Wealth Management Project Sponsor Deliverables

Robo Implementation Head of Advisory

Definition of target business model, process design, operating model, business requirements, implementation phasing and conversion planning

DOL Fiduciary Strategy COO Documentation of “revenue at risk” analysis by channel, product, client segment. Assessment of business options costs and risks presented to executive management

Private Bank-in-a-Box CIO Business requirements, target architecture, RFI-RFQ-RFP process management, joint-design sessions, business case and program management

Client Facing Technology (CFT) Strategy CIO Advisor assessment for wealth management market including client buyer values analysis (voice of client). Assessment of alternative technologies

Business Architecture Review CIO Determination of the business capability model and mapping of strategic initiatives, costs, business impacts and regulations

Channel-Branch Review COO Review of the multi-channel provision of service through branches, home-office, service centers and technology devices (PC, tablet and mobile)

Digital Financial Planning CEO Product strategy for VC backed start-up entering the digital financial advice market to combine goal-based and cash-based planning techniques


Cyborg Strategy: Build Vs. Buy?

The fiduciary era will drive a rapid adoption of new technologies as banks add wealth management capabilities and traditional brokerage houses add banking solutions.

Although third-party solutions can improve speed-to-market often at lower costs than internal builds, they can create additional risks. Sample build-buy questions include:

Investment portfolio decisions

1.  Do you fully understand your total cost of ownership for your own technology?

2.  In which areas does it make the most sense to buy or rent an external solution?

3.  Does your firm actively keep track of external vendors and internal technology solutions (including SWOT)?

4.  Has a rigorous business case been prepared? Vendor selection decisions 1.  Has a thorough vendor selection been performed? 2.  Is the vendor economically viable? 3.  What are the scaling issues that need to be considered?

4.  What are the integration issues: people, process, data, compliance, reporting?

5.  Has the vendor contract been properly structured? Implementation decisions 1.  Can the vendor support a large implementation?

2.  Who will perform data conversion/client onboarding? 3.  Can vendor solutions be deployed in a SAAS or cloud

configuration? 4.  How will support issues be handled: level 1-2-3?

5.  How will compliance oversight be managed? 6.  What are the DR or BCM options? 7.  What are the data retention options? 8.  Have security and data privacy issues been resolved?

Cambrian Consulting can help you screen external and internal solutions for your digital strategy 2.0

Digital Engagement & B2B Robos

Digital Financial Planning Providers

Wealth & Banking Technology Platforms

Aggregation & Analytics Providers


NextGen Technology Partnerships

Robo marketing and content analytics for

RIAs

Digitizing financial planning

NextGen retirement platform

Digital investor and cost basis

solutions

Data driven BPO solutions

Streamlining private placement

issuance

HTML5 acceleration

Financial modeling

We have deep relationships with leading-edge technology firms who offer innovative solutions for wealth managers.