What Role Will Robo-Advisors Play in the Financial Services Industry?
February 13, 2018 by Paul Conley
This year marks the 10th anniversary of the launch of Betterment and the birth of the robo-advisor craze. At the one-decade mark, the future of robo-advisors seems assured, but the specifics of how they will interact with other segments of the financial services industry remains unclear.
Multiple approaches have taken hold. There are independent robo-advisors; banks and brokerages that have built their own tools; and big financial services names have brought start-ups in-house, yet all robo-advisors, their owners and users enter 2018 with a bit of uncertainty.
Here’s why: “Open banking,” which requires major banks to share customers’ data with third-party providers, arrived in the United Kingdom on Jan. 13 as part of a new law. That means British consumers can now use any app — not just the ones made available by their bank — to manage their funds.
APIs and Shared Data
It must be noted that open banking is a British phenomenon and hasn’t come to America yet. Open banking is also quite limited in scope; under the new law, banks are required to share access to client accounts and account information with third-party fintechs, with client approval via Application Programming Interfaces (APIs). However, the third-party providers typically fall into one of two categories: Account Information Services Providers (AISPs) and Payment Initiation Services Providers (PISPs).
Open banking seems to point to a broader future of seamless, multifaceted open finance in which consumers choose the apps to manage all their accounts no matter where they might be. This means that the in-house robo-advisors banks and brokerages have deployed to great success in recent years would find themselves in an entirely different and new competitive environment.
All in the Family?
In December 2017, Morgan Stanley unveiled a proprietary robo-adviser dubbed Morgan Stanley Access Investing. Unlike many of its competitors, Morgan Stanley built its product in-house from scratch. Morgan Stanley Access Investing was not born of a merger, a partnership, a takeover or a white-label licensing deal.
However, that’s where the differences end. Like the robo-advisors of many of its competitors, Morgan Stanley’s robo-advisor seems to have two primary purposes: To attract millennials and to eventually get those millennials in front of Morgan Stanley’s human advisors.
In a statement announcing the product, Naureen Hassan, chief digital officer at Morgan Stanley Wealth Management, said this “is an opportunity for financial advisors to grow their book of business by making connections with prospects earlier and eventually establishing full-service relationships when clients are ready.”
The approach of adding a robo-advisor component to an existing B2C powerhouse is typical among established financial-services companies. To many of the big players, robo-advisors are simply a new way to bring new customers into the old institution.
In a more complicated version of that strategy, BlackRock purchased robo-advisor FutureAdvisor in August 2015 as a B2B play. BlackRock is the world’s largest asset manager, and its iShares products are a major force among the Exchange-Traded Funds (ETFs) that dominate consumers’ robo-advisor accounts.
According to notable finance blogger Michael Kitces, BlackRock’s plan is to “license/offer the technology platform to a wide range of broker-dealers, insurance companies, banks and custodians to turn their human advisors into tech-augmented ‘cyborg’ advisors… [and eventually] grow the size of the ETF pie and the Blackrock (iShares) market share.”
Or All Over the Place?
It’s clear that whether through a B2C or B2B approach, financial institutions are using robo-advisors to expand existing operations. Therein lies the challenge posed by open banking.
If the idea of open APIs and total consumer choice should gain headway here in the United States, financial institutions are likely to find that consumers and new fintechs that serve them will demand more choice and variety than is found in today’s robo-advisors.
The capabilities that emerged in the first decade of robo-advisors, such as automated investing, tax-loss harvesting, investment and retirement planning, etc., are impressive, but the next decade is likely to see demand for robo-advisors that interact with apps that manage everything in a consumer’s financial life: bill paying, checking accounts, tax preparation, budgeting, insurance, personal debt, mortgage selection, auto loans and investing.
And in a world like that, it’s going to be hard for any single financial institution to dominate a consumer’s money life.
