Future of Investing

Why big financial firms are building robos instead of white labeling

  • Wells Fargo, Morgan Stanley and JPMorgan Chase have all launched their own digital investment products; Goldman Sachs, Raymond James, YF Financial and ICBC are all currently developing their own
  • Like Walmart’s purchase of Jet.com to compete with Amazon, large financial institutions are launching home grown robots-advisers to compete for DIY or too-small investors
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Why big financial firms are building robos instead of white labeling

Some of the biggest financial firms are looking to claw back some control over their clients by building their own digital investment services.

In November, Wells Fargo launched Intuitive Investor, its digital-human hybrid offering from Wells Fargo Advisors. The following month Morgan Stanley launched Access Investing and JPMorgan Chase launched JPMorgan Digital Investing. Goldman Sachs, Raymond James, YF Financial and ICBC are all currently developing their own.

It’s part of the banking industry’s natural ebbs and flows when it comes to technological changes and the cultural shifts that come with them. Banks were on guard when startups came to eat their lunch, then they softened their stance realizing they need startups’ good technology and fresh ideas as much as the startups need banks’ scale — and customer trust. Now that they’ve strengthened their mobile and digital offerings, at least the largest and most well-resourced companies, they’re ready to reclaim their control over clients before others beat them there (and it only took them 10 years).

“There’s this growing notion that whoever controls the front-end experience ends up having a lot of control over the client,” said Boaz Lahovitsky, svp of wealth management at Genpact. “The banks with enough resources don’t want to risk giving third parties so much leverage, whether they take the client later on or use that experience — which is a critical piece because no clients like to change the interface — to extract the value out of the client relationship.”

The start of the robo phenomenon was meant to address small, do-it-yourself investors, said Tom Streiff, special consultant to HBW Partners.

“A lot of these big firms have a lot more small accounts than they’re willing to admit,” he said. “Robos were one answer to that. Now they want to have something that has more of their own mark on it … not just to get the technology but to get the smart people inside.”

Streiff compared the trend to Walmart’s purchase of Jet.com “to be their Amazon alternative” to compete with Amazon. The large firms are like Walmarts, wanting to compete where there are investors that want to do it themselves or whose assets are too small.

It’s not just about regaining control over customers. The technology needed to build an offering in-house isn’t as much of a mystery as it used to be and it’s easier now to find and hire small teams for those projects than before, said Lahovitsky.

Another lesson in every part of financial services has been that a new user interface isn’t enough to ensure a quality user experience — changes on the back-end are just as important. Originally, robo-advisors weren’t designed for B2B uses and now many banks white labeling those offerings are converting them from consumer-facing solutions to B-to-B solutions and facing a lot of challenges with the integrations, Lahovitsky said. That leads to the realization that there are technology gaps inside bit companies, and the culture challenges follow.

“You end up with the startup hiring another 100 folks just to deal with a big bank; the bank uses 200 folks for the integrations,” he said.

And the costs after everything just aren’t worth it for a bank the size of Goldman Sachs or Wells Fargo.

“If you have a $30 million-asset under management business, building doesn’t make sense,” said Arjun Saxena, head of wealth management at PwC. “Even if you got 10, 15, 20 percent penetration of that business, the fixed costs involved in the build will not be paid off by whatever margins you think you can make on that type of volume.”

But for a company with trillions of dollars of assets under management, or even the hundred billions, the equation reverses, Saxena added. “Now it’s preferable to be building as opposed to buying or renting where you pay a basis point fee to the white label provider.”

UBS, Citizens Financial, Pershing Advisor Solutions, John Hancock and State Street are all still white labeling robo offerings from SigFig, Motif or NextCapital.

Typically, the white label provider will take 15 basis points of the total and leave the rest to the bank for distribution, Saxena said. Pricing from independent players, like Betterment or Wealthfront, is competitive.

“If you have a large base you think twice about paying 15bps. If you expect your business to grow over time it’s not wroth it to do the white labeling, you might as well sped the up-front cost of developing,” he said.

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