It's Not F@#$%!ng "Robo"!

By Josh Book (Approximately a 3 minute read)

There is a sentiment percolating in some corners of the financial services’ ivory towers (many to whom our firm provides data, research and advisory services) that what’s been called “Robo-advice” is a failure. Just this past weekend, Canada’s leading newspaper and business publication the Globe and Mail put out an article entitled “Why Wealthsimple and Robo-advisors aren’t Scaring Bay Street Anymore”, click the link if you missed it. But we simply don’t agree that this tells the full story.

Of course, we can also see very real signs that digital advice is making progress, certainly in the US market as an example. Investment News reported just last week this very idea in its piece “Robo-advisors continue swift asset growth” – notwithstanding that the AUMs quoted combined self-directed investing digital assets and digitally led advice. The numbers are still trending up and those distinctive platforms have only just begun to exploring ways to reach more customers digitally by integrating the advice and self-directed offers more creatively.

There is no doubt that upstart firms have not acquired the customers or assets forecast in their venture rounds – more on this shortly. On the other side, incumbents who acknowledged a need to respond with digital advice offers of their own have similarly struggled to motivate consumers to join and have in many cases began the orphaning of those digital properties – a huge mistake in our view.

Upstart digital advice firms are having to navigate pressing “Cap Tables” fraught with challenging assumptions instead of having the freedom to innovate their businesses. Poorly conceived (if conceived at all!) digital wealth advice customer journeys tied to data-void execution and archaic approaches to consumer engagement have proved to be obstacles for a rush of new clients and their assets to digital wealth advice properties from bank brands. But does this equal failure? It depends. There are system forces that are playing out in the evolution that are perhaps more telling at a macro level.

To assess success or failure of digitally led wealth advice on traditional wealth management metrics (AUM or # of clients) seems a shell game at this stage, but more importantly misses some key principles of innovation and business evolution critical for the evaluation of markets and trends. In an homage to the great Clayton Christensen, lost too soon and just recently, it’s far too early to determine winners and losers. We’re just beginning to see the first seeds of retail financial services and wealth management change begin to bloom. There will be more. In his “Innovators Dilemma”, the following excerpt is well applied in this evolving retail financial services space and helps us better understand many of the incumbent issues:

“The reason [for why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.

Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies (or business systems) and can only be sold in insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”

As I mentioned in the Globe and Mail article; “Cool technology alone isn’t enough. Mobilizing consumers into a new wealth-management space isn’t the same as having them try Uber.” Ergo, while the product/service experience is critical it’s not easy to differentiate on. Each platform will evolve in similar ways albeit some with varying elegance etc.

But there’s also lots to be optimistic about. Our data shows consumer understanding of digitally led wealth advice is increasing. And that means more consumer understanding of wealth management period. Only a small percentage of populations have ever really been engaged by the wealth management category - traditionally only provided to the wealthiest few. But now, for the first time, these value propositions are available to anyone with anything. The foundations are shifting and shifting fast. As the complexity for money management reduces and people start to understand the impact of their behavioral choices and are actually “helped” to make better choices there will be firms that benefit from a new retail financial services ecosystem.

Figure 1: Year over Year Changes in Category Understanding of Digital Wealth Advice

Assessing consumer intent should some of the larger, and more trusted, tech brands join the fray foreshadows what could happen. These data are nationally representative samples of adult aged North Americans. These individuals have varying but generally low levels of financial literacy and previous engagement with the wealth management industry. Yet large swaths of the population are ready to “trust” a big tech giant with their money.

Figure 2: Intent to Sign Up for Digital Wealth Offers from Tech Giants

Bottom line is that the retail financial services and wealth management ecosystem is only seeing its first changes. The notion that massive numbers of people will NOT be one day consuming savings and investing services predominantly in digital will prove to be an antiquated idea. For those that sit in the camp believing that a slightly more modern version of today’s existing traditional wealth advice models will rule the day - I say that you might be right…but only for a little while. But I’d also say that change will come faster and faster. Are you doing the things you need to stay ahead? Perhaps the first step might be to stop calling it “Robo-advice”.

The greatest compliment you can give is to share this post with someone who might be interested. It is dialogue, after all, that shapes the future!