5.1 Introduction

Unquestionably, the mission of the industry should be the provision of investment services to individuals and families, with the goal of optimizing and fulfilling their financial well-being over time. However, business reality is not always aligned with this foundation. Private investors have found it notoriously difficult to make investment decisions, financial intermediaries have ultimately enjoyed an advantageous asymmetry of information with regard to direct and indirect conflicts of interests and the costs embedded in their services. Their placing power has exacerbated the product-driven aspects of traditional advice, steering the main focus away from clients' actual goals and risk tolerance. The economic incentives granted to involved professionals (e.g., bonuses, sales loads) favoured volumes and transactions over investor satisfaction. The damage to reputation suffered by traditional firms during the GFC reinforced the call for tighter market regulation (e.g., FINRA rules, MiFID II, RDR, FoFA), which has significantly increased the cost of compliance and severely reduced their potential profitability by enforcing higher transparency on costs and conflicts of interest. Nowadays, the unveiling of the asymmetry of information is forcing wealth managers to rethink their product-driven approach at a time of declining margins, and establish a healthier relationship with final customers based on clearer client/portfolio-centric methods. This transformation is anything but easy! Incumbent organizations rely on established hierarchical structures which are modelled around decades-long commercial motivations. They are not aligned with the strategic imperatives brought forward by disruptive technology and demographical changes. But the epicentre of the earthquake sits in the war rooms of regulatory bodies and policy-makers, and their battle to embrace technology shifts, protect investors, and remain pro-business. Paradoxically, regulation is meant to act as a counter-balance to incumbents' economic interests compared to those of taxable investors, but can also be a barrier to entry for smaller and innovative contenders. Robo-technology and customers' analytics have helped FinTech innovators to break through even in such a highly regulated industry. The discussion in this book about Goal Based Investing questions the remaining though relevant aspects of traditional finance and provides a way out of the impasse in the “race to zero”. Smart compliance can become a competitive advantage to capture market share and generate higher revenues.

This chapter discusses key business dilemmas and presents the future outlook of an industry which is transforming rapidly towards fee-only models and more digital financial advisors, capable of embedding automated investment services into their practices as Robo-Advisors become institutionalized. They also feel the pressure to transform and counter the resurgent competition of incumbents, and thus launch Robo-4-Advisors and Robo-as-a-Service platforms.

5.2 Wealth Management Firms: Go Digital or Die

There is no generally accepted definition of wealth management firms, but two main criteria are traditionally used: the constitution of their client base (e.g., assets under management or advice) and their modality of interaction with clients (depth of personal relationships and broader scope of services). This does not seem to hold any longer. First of all, financial institutions typically divide their clientele according to the 1 million dollar rule, as in the wealth pyramid of Figure 3.5: below this figure would be retail banking, of which affluent clients owning more than a hundred thousand dollars, above private banking. Wealth management typically refers to the services provided to clients above a hundred thousand dollars: affluent, HNW and UHNW. This triage has been progressively criticized because banks have realized that affluent customers had been somewhat underserved and they have started looking for ways to institutionalize the private banking relationship with a top down approach: making the personalization of private banking affordable to less wealthy individuals. Robo-Advisors moved faster with a bottom up approach, by launching industrialized solutions that appeal to customers of retail banking, but observed that the same services were attracting affluent and wealthier investors. Second, with respect to their modality of interaction, Maude (2010) identifies three attributes: the breadth and depth of the relationship that wealth managers have with their clients; the products and services provided (e.g., tax advisory expertise, alternative investments); and the specific objectives of wealthy clients (e.g., investment performance, wealth transfer). But this criterion does not seem entirely appropriate any longer either. Younger generations are starting to manage personal and professional relationships differently from traditional customers. They demand “any time, anywhere” access, they face a broader variety of life events and therefore possess a variety of interdependent financial goals to be fulfilled at once. Therefore, the relevance of investing with a clearer goal perspective is soaring across all client segments. As a result, the line dividing retail and private banking is getting blurred, as well as the divide between retail bank customers and affluents. Firms are testing new analytics to perform client segmentation according to individuals' techno-literacy, social behaviour, personality, and goals more than their wealth or the dedication of appropriate advisory workforce. This fits the transition away from a cost-orientated model (e.g., sales loads) towards an income-orientated approach (e.g., fee-only advice). But it causes due concerns within incumbent organizations because the adoption of a client/portfolio-centric model does not seem to be aligned with traditional incentive mechanisms. Moreover, existing sales staff might be under-skilled to operate in a portfolio/client advice modality. Once again, cognitive technology might help to raise both the depth and efficiency of a new breed of Digital-Advisors. A more refined client segmentation is essential to counterbalance the reduced placing power of distribution networks, so that digital branding of products and services becomes strategic. The catalogues of open architectures look too crowded to steer interest towards higher margin yet simplified services. There will be less space for marketing or advisory campaigns based on the next hot product or market driver (e.g., Asian stocks), to favour more holistic and hopefully gamified goal based propositions.

The need to combine traditional triage with added-value services in ways that are convenient and engaging will lead to the generation of a mixed environment where Robo-Advisors and personal financial advisors coexist, and also interact by means of digital advice, which is a hybrid of human advice and Robo-4-Advisors (as in Figure 5.1).

Are transforming retail and private banks at risk of getting stuck in the middle of the crossing? Transforming at once into a fully fledged fee-only business seems unfeasible given organizational resistance and a gap in technology and education. Yet, retreating to the product-driven stronghold would expose cost/income sustainability to unbearable risks, as clients move out and compliance costs sky-rocket. The bank of the future is not asked but forced to be truly digital, to offer a predominance of fee-only services, to gain operational efficiency by broader robo-automation, and to embrace goal based holistic approaches by which to build a balanced, compliant, personalized, and added-value dialogue with final investors. But spending to go digital will not be enough without a change in the philosophy driving the making of personal investments: technology and finance must innovate together. Goal Based Investing is the only path ahead to give substance to the digital revolution and increase business margins in a competitive digital industry. Four strategic imperatives can be discerned: go digital, become income-orientated, go robo-technology, embrace Goal Based Investing.

First, digitalize! The adoption of digital technology will allow banks to democratize the access to their services and enhance customer experience. Although design thinking is a must, wealth management digitalization is not purely about aesthetics and ergonomics, but primarily about effective personalization of the whole investment experience, which is a blend of robo-technology and Goal Based Investing.

Second, become income orientated! Investments in innovative technology and proactive compliance can become effective only if business incentives are realigned to client/product-centric propositions. Banks will profit the most from the digitalization challenge only if they prove to possess a flexible corporate culture, capable of embracing the transformation of organizations and processes.

Third, go robo-technology! Robo-advice is not just a buzzword for research analysts and social media commentators, but an operational imperative for those banks capable of going digital, prioritizing wealth management offers, simplifying back-office operations, and automating key parts of their workflow. Yet, launching Robo-Advisors targeting customers of retail banking or Millennials is not a good enough strategy because banks are not single minded businesses, clients have more than one need and, most importantly, human advice and robo-advice are not incompatible but can sit together. Learning from the elements of automation that Robo-Advisors have put forward is their real opportunity since robo-technology would be more relevant to them than outright robo-advice (as in Figure 5.2). It is not about Robo-Advisors, but robo-technology.

Fourth, embracing Goal Based Investing is key for innovative investment experiences to address holistic well-being and direct transparent dialogues about personal ambitions, fears, and opportunities. This shift requires banks to update investment policies of portfolio construction and abandon the asset management perspective (e.g., benchmarking) to embrace Goal Based Investing, Rebalancing, and Reporting as presented in the second part of this book.

5.3 Asset Management Firms: Less Passive, More Active

The fate and transformation of retail and private banks affects the operating model of the asset management industry as well. Asset managers are possibly confronting the biggest disruptive threat among the players of the supply-demand chain, but the smart ones might also be front runners in the race to zero if they can embrace robo-technology. Asset managers are still the basic manufacturers of most investment products and can transform into very competitive Robo-Advisors. Why bother? First of all, because the regulatory shift, which seeks to shed light on their opaque payment model, is squeezing their profitability and places them at odds with the changing incentive schemes of traditional firms and distribution networks. Second, because asset allocation has been progressively commoditizing and there has been growing criticism about the fairness of the price/benefit relationship of mutual funds compared to cheaper forms of passive investing (e.g., ETFs). Third, because traditional platforms might not provide them with a good enough distribution channel: the shift from product sales to portfolio propositions triggers a simplification of their overcrowded shelf, and forces them to focus on a smaller number of funds which compete more fiercely on branding and costs. Fourth and last, because even those asset managers capable of differentiating their investment ideas (e.g., active fund managers) might not remain successful due to rule based algorithms which can disrupt their operating model. As a consequence, while large manufacturers and distributors of mutual funds can harness further economies of scale by launching conveniently branded Robo-Advisors, robo-technology is seriously threatening mid-sized and undifferentiated asset managers. They are asked to do two things: scale their business and reach out directly to investors.

“Merge and acquire” is relevant to remaining sustainable in a price competitive world.

Geting closer to final investors is an imperative, which can be achieved by launching Robo-Advisors or signing strategic alliances with existing digital solutions.

Traditional asset managers seem to encounter a cultural obstacle because a culture gap still exists between them and wealth managers. Building portfolios to tame the markets (e.g., alpha seeking) is not necessarily aligned with the needs of private bankers to manage wealth through the cycle. The necessary adoption of Goal Based Investing principles would further diverge the perspectives of these professional players. Asset managers might find it difficult to transform from providers of products into providers of automated portfolio solutions based on their own funds, although this would be their best chance to become more integrated with digital distribution channels and provide price competitive services which FinTechs and direct banking might not be able to compete with.

5.4 Robo-Platforms: Less Transactions, More Portfolios

The existence of trading platforms dates back to 1973 when The Society for Worldwide Interbank Financial Telecommunications (SWIFT) was established to facilitate a standard approach to messaging and payment data processing among international banks. Advances in technology have facilitated the affirmation of electronic exchanges against trading pitches, the NYSE trading floor being the last relevant human pitch remaining. The 1990s saw the establishment and rise of many electronic platforms to facilitate self-directed trading by non-professional individuals. With the bursting of the Dot-Com bubble and higher volatility brought about by September 11th, e-trading platforms were pushed to specialize and service the most experienced clientele: nowadays most platforms provide desktop applications which resemble professional trading systems. Recently, the open architecture model has become an essential approach to grant access to investment opportunities, particularly in the US where platforms support a wide range of distribution channels (brokers, personal financial advisors, insurers, asset managers). Europe has so far had a patchy marketplace: the UK's distribution network is geared by platforms, the Nordic countries have a predominance of closed architectures, while continental Europe is fairly mixed. The progressive reduction in the predominance of universal banks within the European distribution market should facilitate the growth of personal financial advisors, and thus the propositions of platforms. Asian platforms are also emerging as competitive distribution channels. However, in a more digital and fee-only world financial advisors are progressively less “incentivized sellers” and more “sophisticated buyers” starting to demand more robo-advice for advisors (i.e., Robo-4-Advisors), based on long-term portfolio management with passive investments instead of idiosyncratic trades, which puts pressure on platforms' pay-per-tick margins. Digital education of self-directed investors is also growing more relevant. Investors are becoming more informed about price differences, can access directly a broad range of financial information, and feel a lot more comfortable managing their portfolios online compared to the 1990s. Machine learning and Gamification could strengthen platforms to improve and become more profitable, especially in fast growing markets like Asia.

Therefore, platforms have a clear competitive advantage as they are already embedded in the work of many financial advisors and could master the digital revolution by engaging in a robo-transformation of their business model, hence turning into vertically integrated Robo-Platforms.

5.5 Digital-Advisors: Empowered Customization

Financial advisors are a very influential factor in the makeup of investors' portfolios, as they sit at the forefront of the wealth management relationship and are asked to advise clients through the cycle on a broad range of goals related to their financial well-being. According to a recent study on Canadian households' portfolios by Foerster, Linnainmaa, Melzer and Previtero (2014) advised clients take statistically more risk in their asset allocations, thereby raising expected returns, although there seems to be limited evidence of customization. Advisors seem to direct clients into similar portfolios independent of their clients' risk preferences and stage in the life cycle. Social trends are demonstrating that personalization is becoming progressively relevant to younger generations, and thus must be embedded within the full advisory experience for advisors to stay competitive. Therefore, the main challenge they face is to find the right balance between a progressive commoditization or robotization of portfolio management and a high perception of personalized advice. All for the right fees! Individuals are truly becoming more comfortable managing their wealth online but they also need to be guided through a process of self-directed customization. The synthesis of these conflicting desires can be termed empowered customization, which means being guided through the investment decision-making process instead of being taught about it. Both Robo-Advisors and personal financial advisors are competing in this space. If you cannot beat them, join them. Hence the rise of Robo-4-Advisors which aim to create a new professional being, the Digital-Advisor or cyborg, as many commentators like to call it. The advantages of merging personal advice and robo-technology are not limited to portfolio management and profiling, but extend to prospecting. Individuals increasingly rely on social media and peer-to-peer recommendations to learn investment ideas and trust relationships, instead of their being passed on from father to son. Therefore, old-school advisors will suffer the most, as they find it difficult to reach out in a digital world, while younger and techno-literate professionals could exploit new technology to their advantage by penetrating communities of potential clients by means of social media networking. Digital-Advisors could therefore benefit from the vertical integration offered by Robo-4-Advisors or new Robo-Platforms, thus outsourcing the building blocks of portfolio rebalancing to robo-solutions and freeing up valuable time for “gamma tasks”: social media relationships, blogging, on-boarding of new customers, walking clients through their life cycle, proactively engaging with their evolving ambitions, risk tolerances, and multiple financial goals. Three drivers of transformation affect the practices of personal financial advisors and three recommendations can be given to master digital change: focus on the generational divide, have a digital life, take care of retirement.

First, master the generational shift! Wealth is about to change hands as Baby Boomers retire, de-cumulate from their investments, or pass them to younger generations. This creates a divide between the approach and fate of financial advisors because new generations are more likely to change their provider of financial advice than older cohorts. According to a study by Cerulli Associates (2013) 43% of US advisors are over 55. As Baby-Boomer advisors are servicing a more mature population, they might not feel compelled to embrace change as they themselves are approaching retirement. New entrants can grab this chance and target both inheritance money as well as the new generation of HENRYs.

Second, have a digital life! Robo-technology allows verticalization of the wealth management workflow of small firms, facilitates faster on-boarding of prospects, offers recognized digital branding, and adds efficient digital dialogues with final investors. Although first adopters of robo-advice seem to come from the pool of already self-directed investors, more than personally advised AUM, FinTechs are posed to attract a much larger portion of advised AUM by competing with those professionals who are not embracing modern CRM competences. Therefore, embedding Robo-4-Advisors within human advice saves time from red-tape and routine, and allows more focus on “gamma tasks” to retain customers, on-board prospects, improve reporting, justify advisory fees, and optimize cost/income. Advisors can learn to run blogs to become relevant and share content with their clients and prospects in ways which are more relational and less prescriptive. Clients might appreciate learning what others do more than being told what to do. Digital presence gives advisors the means to stay relevant, but also prove their propositions by crafting social media nudges.

Third, take care of retirement! The wealthy population has been ageing fast, life after retirement has been extending favourably, while government finances have been exposed to unprecedented stress. Taxable investors are becoming more aware that government sponsored schemes might not be enough to sustain their purchasing power during their golden years, while retirement plans linked to the dynamics of financial markets have created excessive exposure of investors' nest eggs to the financial cycle. This is creating a broader request for personal advice on long-term investing, which is typical of financial planning solutions, but requires higher competences of financial markets, which is typical of financial advice. Digital technology and Gamification offer solutions to visualize the impact of investment decision-making in the long term, which human advisors should embrace to enrich clients' decision-making. Due to the behavioural and psychological complexities of managing holistic discussions with individuals and families about long-term financial planning, Digital-Advisors seem to have a competitive advantage compared to self-directed offers, as long as their pricing point is attractive. Financial advice and financial planning can converge to forge a very competitive workforce of independent Digital-Advisors.

5.6 Robo-Advisors: Be Human, be Virtual, take care of Retirement

FinTechs have started a revolution in the banking industry on a global scale, since they leverage technology to anticipate the transformation of the business models that banks themselves will have to chase and comply with higher fiduciary standards and clients' digital behaviour. Robo-Advisors have found a fertile terrain in the US, given its higher penetration of personal financial advisors, broader reliance on retail distribution platforms, higher financial literacy of taxable investors, much more open debate about banking practices and asset management weaknesses, and a more vibrant usage of social media for online peering across all generations. Although their portion of total AUM is still lagging the trillion target to pay back the bills, venture capitalists have been pouring in substantial money by recognizing their highly disruptive potential. Recent evidence shows that incumbents adopting robo-technology can on-board AUM at an even faster pace, as shown in Figure 5.3.

The fact is that, while FinTech Robo-Advisors initially exploited social media to attract customers, and still use it to strengthen their brands and provide education on long-term investing, marketing campaigns on traditional media cannot be avoided altogether and they are quite expensive.

Therefore, much capital will have to be dedicated to marketing instead of pushing ahead on competing innovation to stay relevant against incumbent firms. Most importantly, as incumbent institutions embrace robo-technology the distinctive message of disruptive FinTechs tends to be diluted. Regulators are also looking more closely into the phenomenon, which will soon translate into higher compliance costs. Therefore, the most compelling challenges of FinTech Robo-Advisors can be summarized as follows:

• fund higher marketing costs for every new client acquired;
• abandon the race to zero;
• differentiate better against robo-peers;
• provide multiple services, without losing on simplicity and effectiveness;
• face higher compliance costs.

What to do? Three trends can be identified as opportunities to match the competition, stay ahead, and grow: go human (Robo-4-Advisors), go virtual (Robo-as-a-Service), chase retirement money (Robo-Retirement).

First, Robo-4-Advisors will help digital players to “go digital” and institutionalize their offer by leveraging AUM penetration of personal financial advisors.

Second, Robo-as-a-Service will help digital players to “go virtual”, that is offer their digital and automation capabilities as services to mid-small financial institutions, looking for robo-technology but lacking the knowledge, time, and expertise to build on their own. By blending B2C/BTBTC models and BTB offers they can diversify their sources of income. Subscription fees harvested from long-tail consumers can be volatile, while SaaS services can help to lower earnings volatility.

Third, Robo-Retirement solutions have great potential and can help Robo-Advisors to evolve from single mindedness into more holistic management of financial well-being. It is easier to disrupt by capturing an existing need rather than creating new ones. The impeding retirement crisis coupled with the generational shift of wealth towards younger generations will provide this opportunity. More than US$ 30 trillion are about to change hands in an environment where retirement insecurity is due to sharpen, which will prompt taxable investors with compelling needs for advanced financial planning.

In fact, FinTech Robo-Advisors are already signing strategic alliances with platforms, asset managers, and banks, aware that their price advantage might not last long. Yet, incumbents serve a greater breadth of personal needs which provides the right fuel to run Goal Based Investing engines.

5.7 Conclusions: Clients take Centre Stage, at Last

Robo-Advisors are changing the way investment decision-making operates with taxable investors. They are disrupting established wealth management businesses by unveiling the asymmetry of information of traditional offers. However, today's transformation is not solely driven by technology: tighter regulation and new client behaviour might be dominant forces operating under the crustal plate of the wealth management industry. In such an evolving digital world financial advice is due to become:

• less product-driven, more client-centric;
• less myopic-trading, more long-term portfolio-making;
• less volume-driven, more added-value focused;
• less cost opaque, more fee-only transparent;
• less asset management (e.g., benchmarking), more wealth management (e.g., advice on holistic financial well-being).

Goal Based Investing is the investment philosophy that corresponds to all these changes. Gamification is a way to simplify the challenges of creating solutions for holistic well-being.

This takes us directly to the last part of our book.