What keeps you up at night? Thats a perennial question in management. For bank program managers, youll typically hear answers about being blindsided by compliance issues, staffing problems or technology failures.
To be sure, those are tough situations, but at least there are measures you can implement to minimize these risks: enhance supervision, or dedicate more resources to compliance and technology backup systems.
But to my mind, the real threat that will fundamentally change our industry comes from the newest competitors.
If you want a good scare, go to YouTube and watch the new videos from Wealthfront. Or maybe youve already seen its commercials on TV. Others in the same niche include Betterment, WiseBanyan, Personal Capital, Motif Investing, FutureAdvisor and Blooom. They all can manage investor money, typically using ETFs with risk tolerance, time-horizons and other input from the client.
The compelling feature of these firms is their low cost, reliance on impartial data analysis underpinning investment recommendations and automatic rebalancing.
The game changer is the elimination of the need for a dedicated person for advice.
Its estimated that the top 10 robos have a total of about $10 billion in assets under management. This is a tiny portion of the estimated $36.8 trillion in mutual funds and related assets. So today, robos have less than 0.1% market share.
So why do robos keep me up at night? Consider that ETFs, a mere 20 years ago, also had a tiny market share$500 million in U.S. assets and now more than $2 trillion. There certainly is precedent for a new way to invest to capture significant market share if the process delivers what investors want.
What do investors today want? Exactly what robos offer: low cost, convenience and simplicity.
Moreover, many of them have lost trust in banks and financial institutions in general. And theres little doubt that younger investors and those looking to just start investing will be relying more on technology, social networking and mobile communications. All of which gives robos an even bigger opportunity in this environment.
It comes as no surprise then that at Wealthfront, 90% of their clients are under 50 years of age and 60% are under 35. At Betterment, the average client is a 30-something professional. This is clearly the next-gen of wealth (and those who will eventually inherit their parents wealth).
If all this isnt enough to keep you up at night, several of the big players also have introduced robo services. Vanguard started a pilot program in 2013 and added $3.4 billion in 2014.
Schwabs program, Intelligent Portfolios, was introduced with much fanfare just this year. This no-fee service, with a $5,000 minimum, is designed to address a growing demand for affordable, objective, sophisticated and convenient investment advice, said Schwab President and CEO Walt Bettinger.
All of these services are still not that sophisticated. None of the firms can make recommendations of individual equities or mutual funds or insurance products or alternative investment products.
But theres little doubt that these services in timelikely in the next five yearswill provide as robust a service as virtually any full-service advisor. So while it might not happen overnight, robos will become a major force and competitor in the market.
Will other distribution channels become extinct? No, but I believe that the firms that survive and prosper will have some fundamental things in common.
Banks Still Relevant
First, they will have a value proposition that resonates with investors. When clients can get something free elsewhere, you need to be crystal clear about the value youre adding and why its worth the cost.
Survivors also will have deeper, and perhaps fundamentally different relationships with their clients. Since were likely pretty far off in building strong interpersonal relationships with computers (the movie Her notwithstanding), banks do have a distinct advantage here.
Banks are fully embedded in the community (or should be) and this presence provides name recognition and the opportunity to interact with customers in so many ways: opening a checking account, getting a mortgage, or taking out an auto loan.
And although fewer people are physically going into branches (branch transactions are down 45% since 1992, according to consulting firm Financial Management Solutions) people still need banking services. Theyll just be getting these services in non-traditional ways.
Banks are getting much better at online and mobile services. And while it is still a struggle, FINRA is slowly coming around to actually approving ways for FAs to communicate and market services to their clients.
So even though face-to-face interactions are falling, banks can still be relevant players.
Bank advisors have an opportunity to leverage their existing relationships and make sure they get to their customers children and grandchildrenwhere the money will be 10 and 20 years down the road.
Its likely, at least initially, that a person with some level of training and expertise will be part of the team, perhaps as the point of communication or administrative support, with the robo making the actual recommendations.
And the real wealth management areas may always need a highly skilled financial professional at the forefront, along with the attorney, accountant and health advisor, fully supported by the right software.
Regardless, its clear that many professionals are under assault on all frontsfrom politicians to physicians.
The publics trust has eroded, and everyone questions motives and the value theyre getting. When it comes down to it, trust may be the main issue. So make sure you deserve the trust placed in you. Then, hopefully, you can sleep soundly.