Some clients may need or demand more traditional or human led touches. On the other hand, clients might just want a monthly text message update saying “You’re on track.”
“Being able to deliver these things precisely in for the ways a particular individual demands or desires is the innovation that firms should be striving towards.”
Servicing high net worth individuals and retail investors
There’s a fundamental flaw in categorizing or segmenting consumers according to the traditional industry approach—that is, around asset sizes, and that this asset size equates to the type service demanded aka human led traditional advice. There are certain levels of “wealth complexity” that come with more assets and later life stages that currently can’t be delivered exclusively through digital. Though the “platform” driven advice firms are moving up the curve of complexity to be sure.
“[Understanding what] consumers want, and how they want it, is challenging.”
Retail platforms need to capture as many consumers as possible in the ways that those consumers want to be engaged. This can start at the low end of the spectrum with basic and automated portfolio management, with more services added as more and more data is gathered which helps reveal how individuals want to be engaged by their advice provider.
For instance, Betterment’s Daniel Egan engages in some interesting behavioral economics analyses in which he studies client behaviors to begin to decode what drives certain client behaviours and the most optimal ways to intervene in ways that optimizes that behavior while also driving the experience positively. However, Josh notes that they need to look beyond their own clients, since these represent an already captive audience. If the platforms can find ways to make it more compelling for individuals to delay unnecessary consumption purchases for, say, shoes on Amazon and reallocate those dollars by clicking through that $100 into their wealth account for future consumption we will see the winners for assets emerge.
Active and passive management capabilities in a digital-advice platform
Josh mentions that active management entails a human being who is using his/her judgment to select components of a portfolio that can be delivered to the client, whereas passive management makes use of index funds and ETFs to give exposure to broader markets.
Modern platforms make use of a passive strategy; however, that doesn’t mean that some forms of automation in combination with active management can’t be added on top. The passive strategy doesn’t comprise robo-advisory only, or truly automated portfolio management; while many aspects of it may be automated, the underlying component is run by an active portfolio manager.
“There is an opportunity at least within digital platforms and tools to deliver portfolio management in all the ways that we know today.”
Large-investment management and FinTech collaboration
According to Josh, there are three possible ways in which these categories of market players engage: build, buy, or partner. Most appear to be either buying or partnering, which makes sense because they don’t yet have any expertise to innovate in a digital way, and there are plenty of firms that have a head start at least on useful technology platforms.
As incumbent wealth advice businesses evaluate these three choices, there is an interesting dichotomy between SaaS firms and upstart tech firms willing to white label their platforms.
The upstart tech platforms were for the most part born out of a direct-to-consumer idea and have experience in delivering digital solutions. This offers great benefits to partners or purchasers, because the solutions are much more out of the box. The challenge is that smaller firms don’t have experience working with large enterprises, and the implementation process can be challenging in different ways from the SaaS providers as these agile, flexible upstarts deploy in more complex and big corporate structures – so it’s about managing expectations.
“It’s like a dance, with firms generally selecting a vendor, whether it is an enterprise software provider or a platform that offers a white-label solution. That is how they’re migrating the technology.”
On the flip side, the SaaS providers don’t have as established a tech platform and require tremendous customization into the incumbent business. Josh sees this as a challenge for clients seeking to transition their entire business models towards digital, mentioning that it’s not just something that can be unwrapped and implemented, like an SAP or CRM solution or office software project, since it really is changing the way these businesses need to operate. So the burden comes to the client to make choices about a digital business model without much experience in digital.