Artificial Intelligence

5 questions wealth managers need to ask before launching a robo-adviser

  • Many wealth managers are now formulating a plan to deliver robo-advice.
  • There are some core issues they must first address.
5 questions wealth managers need to ask before launching a robo-adviser

This article was contributed by Steve DiEugenio, General Manager at Glassbox, as part of Tearsheet’s new Thought Leaders contributor program.

Robo-advice describes online services that employ algorithms to provide customers with financial advice and to manage investment portfolios. The degree to which there is human involvement varies from service to service, with some of the more technologically advanced ‘robo-advisors’ requiring minimal human intervention. These technologies are creating a paradigm shift in the wealth management industry, which has traditionally operated through face-to-face interactions by fostering client relationships.

Algorithms are already fully capable of automatically allocating, managing and optimizing clients’ assets by forming a picture of a client’s financial and risk profiles and personal circumstances. But it’s only in the last three to four years that we have seen a notable increase in the popularity of robo-advice services in this industry.

That is because there are a number of obstacles standing in the way of financial institutions deploying robo-advice. Firstly, there is the issue of investor buy-in: let’s not forget that this is a sector that has been fundamentally grounded in face-to-face meetings and client relationships since day one. It’s no wonder that there is strong resistance from investors towards digital advice that is seen to render human interaction obsolete.

However, these fears are far too premature. In the short- to mid-term, robo-advice propositions will be developed as hybrid services that combine digital and human capabilities throughout the customer journey. For instance, robo-advice services will serve to remove repetitive tasks from human wealth managers’ remits, allowing them to focus on value-adding tasks such as developing new insights and communicating with potential and existing clients.

Another, perhaps greater issue is that firms simply do not know what the best route is to take in developing a robo-advice proposition. The initial cost and scale of robo-advice projects are considerable, not to mention considerations of regulatory compliance. For these reasons, wealth management firms are rightly moving forward cautiously. Many institutions are only now starting up projects to determine the criteria for their robo-advice capabilities. It is essential for these firms to know what it is their clients want, what the advisor of the future needs and how this all fits in with the corporate strategy of the institution.

So what are the questions that wealth managers need to ask before they start implementing this technology? In order to best reap the rewards, wealth managers need to understand their target market, the hybrid capabilities they are going to implement, the talent they are recruiting and how to maintain compliance.

Identifying your target market, strategy, customer proposition, and distribution models

To build a successful robo-advice strategy from the ground up, it is essential for firms to focus on the customer proposition, change execution and the integration of best-of-breed digital capabilities. Beginning with identifying the target market is a good start. Once all stakeholders have agreed upon this, the accompanying strategy and customer proposition can begin to take shape.

Mapping out a high-level customer journey is another tried and tested way of going through this process. From experience, one of the best starting points is to design a Target Operating Model (TOM), which is a blueprint of how a financial institution will provide value for its customers. A promising robo-advice strategy takes into account new technologies and third-party software, factoring these into plans to integrate and change existing processes for the better.

Getting your business model right

The majority of wealth management institutions are going down the hybrid route, whereby human and robo-advisors work side-by-side to improve efficiency and reassure customers, rather than a ‘pure robo’ approach. However, from our experiences at Glassbox, it is best if financial firms focus primarily on automation when scaling up their robo-advice propositions.

Paraplanning and suitability are two services that can be automated by creating automated letters offering financial advice and calculating a client’s lifetime allowance to contribute to risk control and efficiency.

Choosing the right technology strategy

The rate of technological advance is only getting faster and faster. For this reason, many companies are purchasing best-in-market software products and integrating those into their existing systems rather than building in-house. Our advice is to adopt new software, rather than adapt your own.

In order to provide the level of service and support that customers now come to expect, wealth managers need to be able to view all the information a client has provided up to that point in the customer journey in real time. That way, they are immediately up-to-date and are able to answer their clients’ queries, armed with all the knowledge they require. In addition, the firm needs to have a complete record of the information shown to the customer, so that in the event of a claim or a dispute the firm is able to undertake a fully informed review and get to the bottom of what happened.

Without robo-advice capabilities and automated processes information-gathering can take days, if not weeks, and use up valuable resources. Even then, there is the possibility that only a partial picture of what the customer saw and what information was shared will be able to be formed – if the customer journey in question took place months or years in the past, that is another issue entirely.

This is why choosing the correct technology plays such a vital role in the implementation of a robo-advice service and the provision of a positive and secure customer journey.

Ensuring you have the right workforce

Wealth management firms need to strike a balance between recruiting subject matter experts and change agents both internally and externally. There is also a difference between how challenger businesses and large incumbent and traditional institutions should recruit, as different brands face different obstacles. Long-established companies enjoy the luxury of having a pre-existing customer base and a well-known brand, whereas challenger firms have to devote their time and capital towards advertising and marketing with a view to building their reputation.

As the industry moves towards becoming a fully hybrid workforce, making sure client-facing agents complement the service given to customers by robo-advisors will be a priority.

Remaining compliant when deploying robo-advice

If the regulator knocked on your door today, could you replay in full entire customer journeys, as seen by the customer? I didn’t think so. What’s more, being able to do this is becoming increasingly difficult. In this day and age, no two customer journeys are the same; websites have dynamic and personalized content suited to the customer and their specific circumstances. There is added difficulty when you consider the various devices with which a customer may interact with a website.

In order for wealth management companies to prove they are being compliant, they need to have a complete record of what their customers have been shown, how long they viewed this information for, what questions customers have been asked and how they answered these questions. Companies also need to be able to replay these records to demonstrate compliance.

These session replay capabilities extend beyond simply compliance; if a customer states that they have a low-risk appetite, but later has a change of mind and selects a high-risk investment, their session can be flagged to an experienced advisor who can talk the customer through the consequences of these choices.

Implementing session replay technologies is straightforward, fast and low-cost, and the benefits of doing so are vast. The greatest obstacle in the way of this is awareness – wealth management firms are not realizing that it is in their interest and in their clients’ interest to record, index and analyze customer sessions online from start to finish. Having session replay capabilities is what will separate the robo-advice winners from the losers in the wealth management industry.

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