Big Banks Could See Sizable Gains from Digital Advice Platforms


Don’t count the big banks out of the robo-advising game just yet.

That’s the message from analysts who closely follow the industry as the market for digital advice platforms gets hotter. At the end of last year, $26 billion in new client assets were managed by just four of the nation’s prominent digital-advice firms: Vanguard’s Personal Advisor Services, Charles Schwab’s Intelligent Portfolios, Wealthfront, and Betterment. That data, accumulated by KPMG in a recent study, estimates that the market will skyrocket 68% by 2020 to $2.2 trillion in assets under management.

But where will the growth come from? Dan O’Keefe, KPMG Strategy banking industry lead, said investors are very interested in an integrated set of capabilities from their digital advisor. In other words, they don’t necessarily want to set it and forget it – they want some kind of human touch.

That’s where the big banks come in.

“Some of the pure play offers out there first were around asset allocation and rebalancing of your portfolio within the funds managed on that particular platform. What clients value beyond that is integration with the broader set of online banking capabilities and ultimately, they want to see an aggregation beyond just assets under management,” O’Keefe explained.

“There’s huge value here and the key is how you position it.”

- Alyson Clarke, principal analyst at Forrester Research

But it’s not going to be easy for some of the biggest players that, traditionally, have been able to access customers easily.

In 2015, data from The Economist Intelligence Unit showed over the last five years, $12 billion in funding has flowed into the financial technology market with an estimated 4,000 smaller firms challenging the nation’s biggest banks for products in their portfolios – everything from payments to currency transactions.

The banks – among them JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) – have to find a way to leverage their businesses and conglomerate-like status to entice customers to their robo or robo-like platforms. While some, like Morgan Stanley have publicly said they’re looking for entry points into the hot market, others like JPMorgan haven’t explicitly stated their intent to dive in…yet.

O’Keefe said the best strategy for the large players is to use what they already have at their disposal: Clients.

“[They] won’t beat the high-volume first movers by doing what they do, so they have to beat them by offering some additional services and capabilities,” he said. “They need to have a competitive offer so they don’t lose their clients to some of the first movers.”

Alyson Clarke, principal analyst at Forrester Research, said the big banks have to realize there are three kinds of customers: Delegators, those who use either a robo advisor or a stock broker to handle all or most of their investment decisions; validators who want to occasionally speak with an advisor to make sure they’re invested in the right places; and DIY investors who trade their own stocks.

What’s been missing, Clarke said, is thinking of investors on a spectrum. That, she said, is the biggest business opportunity and entry point into the market for big banks.

“There are many customers on the books who are untapped. Some have a financial planner and don’t understand brokering, and there’s a way to tap into that base,” she explained. “There’s huge value here and the key is how you position it.”

She suggested moving people out of a bank’s financial planning space and into their new or acquired robo advisor space.

“If it’s done right, it can support the financial planner by putting part of the customer’s portfolio in the robo advice, and some with an actively managed fund,” she said.

The Next Innings for Robo Advice

Dan O'Keefe, KPMG Strategy banking industry lead, said while digital advice platforms have been around awhile, what investors see now is just the tip of the iceberg.

Here's how he sees the space continuing to develop, and the next iterations for these kind of investing platforms.

  • Version 1.0: Focuses on asset allocation models within a set of funds under management at any giving insitution. 
  • Version 2.0: Moves beyond advice and allocation and adds more financial tools and advice around debt, mortgages, lending and gauges an investor's broader financial health.
  • Version 3.0: Moves beyond investment advice and offers products to maintain an investor's well being. 

That would allow the banks to lower the costs and use advisors on consumers who want or need more active management of their portfolios.

In order to get to the point of being able to transfer clients from one part of a bank’s business to another, Clarke said acquisitions of smaller fin tech rivals is key for big players to hit the ground running and become an integral component of the robo advising space. From-scratch efforts, she said are almost a sure losing bet because they take too long to develop, too long to build and in the end, are too costly.

“Smart ones will partner, buy skills and tech they need or partner with someone who does it well so they can bring it to customers… that’s because the brands [already in the market] have distribution footprints, existing customers and brand equity and trust in the market, which attracts customers,” she said.

Clarke and O’Keefe agreed that while the digital advice market is attractive for banks, and there are big advantages to getting involved at the early stages, there are risks – as there are with any efforts to adopt or develop a new platform or investing service.

In this market environment, volatility could either be a game changer or a driver of more customers to better-known brands.

Clarke said a market correction or another “huge drop” like the one seen on Wall Street at the beginning of the year, will be a true test of the long-term viability of some of these so-called new-age investing platforms.

“When that happens, that’s when people want to talk to someone, even if it’s just for comfort or guidance,” she said. “Firms that can offer that through video chat, or a call center – like Vanguard and bigger brands – will do well in that environment because they can keep customers within the robo advisor space and give human comfort, or have the option to transfer into other products.”

O’Keefe agreed, saying the big institutions recognize the need for communication, no matter the scale.

“They recognize the need to be able to have that piece of the equation and that will be a key point of differentiation versus pure plays: A better service level than you would get from fin-tech startups,” he said.