Banks reaching out to millennials with robo advice

This year a whole raft of UK banks have announced that they will be adding robo advice to their suite of products; as reported by Muckle UBS, Investec, HSBC (HSBC, Santander, Nationwide), RBS (RBS, NatWest) have all announced that they will either be partnering to offer robo advice or developing their own solution, and a large number of others have applied to join the FCA’s regulatory ‘sandbox’.

The key advantage the high street banks in particular enjoy is that they already have access to, and know a lot about, very large numbers of existing customers; thereby they can avoid the high cost of customer acquisition that is damaging the bottom line of a number of the fintech start-ups.

However, this pressure has encouraged the early entrants to seek strategic B2B partnerships and distribution channels; a number of innovative solutions have been delivered, including wealthtech propositions that reach beyond pure wealth accumulation.

‘they can avoid the high cost of customer acquisition’

In the US JPMorgan Chase recently became the latest of a list of banks, including Morgan Stanley, Merill Lynch and Wells Fargo, to announce that it would be offering a robo advice service developed in partnership with Californian fintech company InvestCloud.

Analysts there see the addition of online advice as part of a move from the banks to restructure their businesses and order their client data as they seek to deliver more efficient, all-encompassing digital financial solutions; they see the prize as the ability to link a client relationship life cycle from retail through private banking and retirement.

In this regard, the playing field may seem unfairly stacked against the start-ups; banks may be able to offer a low cost, minimum investment product at cost or below, with one eye on the more profitable relationships that may be had further down the line.

Set to go live in March 2018, ‘JPMorgan Digital Investing’ as it is to be called, will charge annual fees of between 25 and 50 bps and will have a minimum investment of $5,000 or less.

However, this is where the start ups seeking to ‘democratise investing’ appear to have a point of differentiation; its minimum investment is certainly intended to appeal to a lower bracket of investor not currently served by JPMorgan, but $5,000 is not chicken feed.

‘a client relationship life cycle from retail through private banking and retirement’

A glance at the comparison table of UK robo advisors shows a number such as Moneyfarm and Wealthify that will allow you to set up an account with as little as £1 and Moola has just reduced its minimum investment to £50; possibly the strategy being to ensure that cash-strapped millennials are at least engaged with their financial future and then to capitalise as they accumulate wealth along the way.

Never stated, but potentially alluded to when JP Morgan CEO Jamie Dimon referred to ‘valued customers’ when announcing its service, it seems that the brand association that many of the institutions have, may imply quality in a ‘reassuringly expensive’ fashion; it will be interesting to see if these boundaries become blurred over time.

JP Morgan expects to attract smaller clients than traditional wealth management does, and believes that as a nursery service, it will add tangible value to the business over time.

Will Trout, analyst at Celent said: ‘It allows them to leverage their massive deposit base and generate a new source of fee income. It also prevents self-standing robo advisors from sucking out assets via other aggregators, plus it offers another entry point to the bank for new customers. They can then be made stickier through aggregation and cross-selling of other products.’

The bank already has a strategy to reach out to millennials, offering a mobile-only banking app called Finn by Chase, launching it in a state where it has no branch presence. The app allows clients to open a bank account in minutes and helps manage their spending; it includes a range of financial tools, allowing users to rate transactions by emojis.

Both Wells Fargo and Morgan Stanley have launched similar apps as part of an overall digital strategy intended to appeal to a younger audience.

Alois Pirker, research director for Aite Group told American Banker: ‘that’s reflective of the real value for banks in digital transformation, any new platform development has to tie into the bank’s existing technological infrastructure through a layer of data.’

‘the start ups seeking to ‘democratise investing’ appear to have a point of differentiation’

‘Banking is hugely siloed; the fault lines that exist between business units are becoming more apparent to clients, and they don’t want to deal with that. When you open an online brokerage account at a bank, they sit you down in an office, and the door closes. I could go anywhere to do that. So you need a data layer, an engagement layer that runs across the business.’

‘Wrangling data is the largest benefit for JPMorgan in partnering with InvestCloud, in which it invested an undisclosed sum last year, Pirker added. The cloud-based provider allows a firm to plug in various processes across its broad platform.’

‘InvestCloud is back office agnostic, organizing data around clients, which is where banks have to ultimately go,’ Pirker said. ‘Usually data is organized around execution and getting business done. This lets you be a lot more agile on the front end — you can change around the client need, because the underpinning data is unified. You don’t have to rebuild offerings.’

A key consideration for the institutions is to decide where robo advice sits in terms of their digital transformation; the most robust solutions will surely occur when online investment management is seen as a way of attracting the next generation of investors and embarking upon a lifelong journey toward financial freedom with them.

Less persuasive will be the defensive, hygiene products that will inevitably appear; these may never wash their face, struggle to integrate with the wider business and deliver no strategic advantage.

In that eventuality a number of MBOs or IPOs would not come as a great surprise, but overall a robo advice service that is strategically integrated, founded upon big data and a thorough understanding of its clients’ needs and requirements, should deliver great benefits all round.