Banks learn robo-speak

Private banking has long been a cut-throat industry, with teams moving from one house to the next on the promise of enhanced salaries, bonuses and perks. But these institutions, already troubled by costs and increasing regulation, are now fighting on another front.  

The new enemy for traditional wealth managers comes from the ranks of well-funded, online automated investment advice platforms. These so-called “robo-advisers” are able to offer computer-driven portfolio services at very low cost. 

The new breed of start-up firms, including US-based Wealthfront, Betterment and Personal Capital, manage assets through unique algorithms, build customised portfolios for clients – typically with exchange-traded funds (ETFs) – and monitor or rebalance them on an ongoing basis, reinvesting dividends, and even harvesting tax losses. 

Offering lower account minimums, robo-advisers have attracted “high earning, not rich yet” clients, according to a recent Goldman Sachs report, or more generally investors underserved by traditional wealth managers. These are usually Gen X or Gen Y clients or “millennials”, typically digital natives, comfortable with technology, with a strong preference for self-service.

 “The big threat for established wealth management firms is that the under-advised mass affluent of today could emerge as the high net worth clients of tomorrow,” says Alois Pirker, research director at Boston-based Aite Group. In the US alone, wealth transferred to the next generations will reach $30tn (€26tn) over the next 30 to 40 years, according to consultancy Accenture.

The growth of robo-advisers is fuelled by changing client requirements as well as a shift to fee-based advice driven by regulation. MiFid II is expected to ban retrocession payments from 2017 in Europe, following the UK’s implementation of the retail distribution review (RDR) in 2013.

Increased transparency on fees is accelerating the shift from active to passive investments, driving a higher use of low cost, passively managed solutions, such as ETFs, in portfolios. 

But established wealth managers are striking back and opening up to the robo-trend, as illustrated by the recently launched Intelligent Portfolios platform from leading US broker Charles Schwab. 

Other banks and wealth managers, including Canada’s BMO Bank, Vanguard, TD Ameritrade and Fidelity in the US have already created their own automated advice solutions. 

One of the merits of digital platforms is to create a new client segment by increasing the ‘size of the pie’ for online investing, says Julie Barker-Merz, president at BMO InvestorLine. 

Back in 2012, the web-based broker launched an online advisory service called adviceDirect, to fill “a significant gap in the market place of unmet client needs”, in particular to serve so-called ‘validators’. These investors require direct control to make their own investing decisions and “unbiased, transparent and professional advice,” says Ms Barker-Merz. This segment is going to grow, driven by “regulatory changes putting a spotlight on transparency, fees and performance,” she adds.

“In the past year, there has been a clear shift for established wealth managers from being fearful about the potential threat of robo-advisers to being much more excited about how they can harness this technology for themselves,” says Joshua Brown, CEO at Ritholz Wealth Management, a young New-York based advisory firm, co-founded in 2013 with CIO Josh Brown. 

Late last year, the firm launched an automated advisory service, Liftoff, aimed at servicing clients not meeting the firm’s typical $1m minimum. Overcoming its limited manpower, the online robo-adviser enables the firm to serve clients in a scalable way. “These clients are paying us less and getting less service but that is exactly what they need,” states Mr Brown.

Indeed, robo-advisers cannot accommodate the complex financial or wealth planning needs of private banking clients. Also, their reach and offering is, today, primarily local, whereas the wealthy typically have global needs.

Private banks can use automated platforms to improve profitability by guiding below-minimum clients to them, a strategy adopted for instance by Bank of America Merrill Lynch through its investment and banking digital platform Merrill Edge, also open to all clients.

But more generally, the move towards automated online advice must be seen as part of a bigger, more disruptive trend, with private banks expected to offer a range of service delivery models to meet clients’ different preferences and needs. 

Most private banking technology investments today are made in the front office space, in an attempt to retain increasingly more demanding clients, states Martin Frick, head of APAC at financial technology provider Temenos. But banks are still heavily reliant on manual processes and have their back-office typically structured in product silos. This means that without first upgrading their back office systems they are unable to offer clients more sophisticated services such as self service trading across different asset classes, or implement automated ‘health-checks’ on portfolios, which requires a consolidated view of the client’s assets.

Cost and risk considerations are major hurdles, combined with misconceptions that technology investments cannot be made in modules, and that new systems cannot be integrated into existing ones, says Mr Frick. 

“Digitisation” has become the buzzword in global private banking, and Asian institutions are at the forefront in offering digital capabilities, with a massive acceleration in recent initiatives. In March, Singapore-based technology-driven DBS Bank launched an innovative cognitive computing solution, DBS Wealth Adviser, supported by IBM Watson technology. 

The system aims at helping relationship managers provide tailored solutions to clients. It has the ability to read research and analyst reports, together with CIO and product desk recommendations and can match them with clients’ risk profile, appetite, investment objectives, past trade behaviour and preferences.

“For RMs, our system is the best adviser out there, as it reads, understands, digests, applies and identifies client needs in a speedy and efficient manner,” says Olivier Crespin, head of the Digital Bank at DBS. True success, when it comes to providing advice, is only achieved when robotics and humans work together in harmony, he believes.

In the same month, Credit Suisse announced the launch of a global digital private banking platform for clients in Asia Pacific, with Singapore the first launch location. There are also plans to roll it out in the US, Switzerland and Europe during this year and in 2016. 

In a region with rapidly growing wealth, and a relatively nascent private banking industry, the key challenge for private banks is to source a sufficient talent pool to cater to demand for wealth management services. 

“A digitised multi-channel service delivery model will bring the relationship manager and bank significant gains in efficiency and higher value-added productivity, and enable the bank to serve clients better and cultivate deeper client relationships,” states Francesco de Ferrari, Credit Suisse’s head of private banking, Asia Pacific.  

Clients are becoming more and more self-directed with respect to their wealth management and seek the tools and business models that enable that, explains Marco Abele, head of Digital Private Banking at Credit Suisse.

He says the bank is building a “fully integrated tool suite” including advanced portfolio analytics, sentiment analysis tools, in-depth research tailored to comprehensive trading capabilities in securities – equities, ETFs and REITs, and spot foreign exchange – “with the aim of empowering clients to make their own financial decisions anytime, anywhere”.

Clients will be able to engage with relationship managers through instant messaging, audio and video calls, as well as screen and document sharing and document annotations on their tablet or mobile. 

Clients want simple, easy-to-use and enjoyable tools. They also want to feel safe, believes Mr Abele. Creating a “pro-active security system” is a key aspect of the digital future of wealth management, he says.

Automated online investment platforms may also be on the agenda, potentially developed alongside a new generation of advisory pricing models, allowing clients to tailor service models to their personal needs.

Digitisation is not just about allowing clients to trade online using mobile devices, warns Dirk Klee, chief operating officer, Wealth Management at UBS. This is already a commodity. “Clients expect us to interpret the jungle of data and provide them with meaningful proposals on how to manage their wealth in a cross-border context,” he says. “This needs to be regulatory fine-tuned and must reflect their investment profile. Using technology to give clients better advice is at the core of digitisation in private banking.”

As part of a wider strategic move towards a fee-based approach, to be finalised by the end of this year, the global bank launched UBS Advice in 2013. This fee-based service for advisory clients has gathered more than SF13bn (€12.5bn) in assets. 

The platform, which interfaces with advisers, systematically monitors 650,000 clients’ portfolios weekly, according to clients’ risk profiles and long-term ambitions, in compliance with regulation. It also generates alerts,  “digital advice” and investment proposals. 

According to Mr Klee, this has freed up advisers’ time, while frequency and quality of client interaction has substantially increased. 

Portfolio performance has also improved, as investment options, which include products selected by the fund selection team, are now based on “sound investment views, provided in a cross-border context, and more timely, fine-tuned information”.

UBS plans to open up this platform directly to clients, so they can review portfolios and make their own investments. But there is little hope for them to access it at a cost lower than the standard service. “We believe we have a fairly priced offering, and digital is just another way to access it,” says Mr Klee, hinting at the possibility of creating a more limited self-service offering with lower fees. 

“Being a luxury brand, targeting HNW and UHNW clients, our strategy is a value for money strategy, not a low cost one.” 

This contrasts with more limited service provided by robo-advisers, offering “very rudimentary, basic advice,” based on algorithms, and operating in a single market, he says.

UBS is planning to invest around SFr2m over the next year to build a “consolidated wealth management platform” with “investment infrastructure” to provide “a globally consistent client experience”. This will also be enhanced by using client data more effectively, taking inspiration from Amazon and Google, which constantly learn from client input and fine-tune their advice on clients’ preferences.

The concept of a direct client investment proposition is gaining traction among private banks. Investec Wealth recently announced that a new simplified advice-based online investment management service will be launched later in 2015 in the UK. Barclays Wealth and ING Private Banking are also looking at introducing automated investment services. 

Some are more cautious. At UniCredit, financial algorithms are used to optimally manage risk in clients’ portfolios, but the bank’s investment view and private bankers’ ability to provide advice remain paramount, explains Renato Miraglia, head of Investment Products and Services at the Italian bank. 

He says the institution is investing in technology to enhance the relationship with clients, broadening the “remote advice” service. This allows bankers to interact with clients remotely, providing them with information to evaluate an investment solution, which the client can decide to execute online. 

Citi Private Bank’s digital ‘In View’ platform, launched last year, “still in fairly stages of evolution,” has offered clients some elements of self-service, focused around traditional banking services, such as moving money or paying bills. These are services high street banks take for granted, but are not obvious in private banking, says Tim Tate, global head of client management at the bank.

The platform gives clients a higher level of transparency and access to data on their holdings, from a very high aggregated level right down to performance of individual securities. This triggers conversations with private bankers that would not have occurred in the past, in a paper-based world. 

The private bank is also looking at the possibility of enabling clients to invest online in basic products such as FX. However, as the global bank serves UHNW individuals with $25m plus in assets, “the investment counsellor and banker will continue to be critical to meet clients’ complex financial and wealth planning needs”. 

The key to future success for private banks is being able to deliver the experience the clients want, without forcing everyone down the one-size-fits-all route, he states.

“Delivering flexibility for clients is critical. Private banks must be able to offer clients the type of engagement they want to have – a one-size-fits-all model no longer meets client expectation and will result in client and asset attrition over time,” says Mr Tate.

Some clients will continue to expect a fully personal experience, others will want purely digital engagement, but the majority expect a hybrid model where their relationship with banker is supplemented by, and enhanced through the use of digital tools. “This latter hybrid model is the one I see being the most critical for UHNW clients,” says Mr Tate. 

But creating apps and other technology tools that are well designed and easy to use is only part of the challenge banks face, he warns. Many legacy processes require hard copy documentation, physical signatures, fax confirmation or call backs. “To fully embrace digitisation and enable a flexible model, banks must challenge every process before digitising,” he says. 

“This requires collaboration between the front office, operations, technology and the control functions and a mandate to drive change. But some of these actors involved in the processes have a vested interest to resist change.”