The rise of the digital adviser

The following is an excerpt from a new white paper, The rise of the digital adviser’, Oranj and the InvestmentNews Content Strategy Studio:

No phenomenon has riveted the attention of the financial advisory business recently more than the rise of robo advisers.

First seen as Internet-spawned curiosities, these low-cost advisory services based on algorithmic models and often backed by venture capital attracted lots of media attention. For a short time, traditional advisers were skeptical that any kind of automated, hands-off service would appeal to an investor market broader than a small cadre of tech-obsessed millennials. But the robos’ steady and rapid growth — even if accounting for a small percentage of the industry’s total assets under management — soon turned adviser derision into fear.

Today, more and more traditional advisers are coming to see robo advice not so much as a competitive threat but more as a complement that can enhance a traditional model if wisely employed.

Perhaps equally important, the rise of robo advisers highlights the opportunities that technology presents. As investors increasingly interact with digital platforms in all aspects of their lives — including, now, in the realm of financial and investment advice — they expect and demand more efficient interactions and service delivery from their financial advisers.

As a best practice, advisers should now view technology as a strategic tool for improving their efficiency, providing an improved client experience – and ultimately increasing client retention rates and attracting new clients. They must go beyond technology’s traditional role in automating back-office procedures and attempting to improve and organize the management of client data.

The digital imperative
For many years, advisers have seen technology as the principal means by which they can efficiently handle the operational aspects of their business. In recent years, in fact, cost pressures on advisers have made the automated back office more of an imperative than ever. Unless operations are managed through technology, not only do the personnel costs of operations impair profitability, but workload burdens easily start to consume valuable adviser time that could be devoted to customer service and business development.

In short, without adequate technology, advisory practices lack scalability, simply cannot compete against their more efficient peers, and lack the capacity to grow their businesses at a meaningful rate.

Increasingly, however, technology for the front end of the advisory business is coming to be seen as an equal driver of adviser profitability, especially as it affects the ability to attract clients and retain them through the delivery of service at levels that current clients — and the next generation of prospective clients — are coming to expect.

Advisers’ increasing emphasis on client-facing technology is reflected in results from the 2015 InvestmentNews Adviser Technology Study. When asked to identify their top consideration in deciding whether to invest in new technology, advisers’ primary consideration was productivity gains, mentioned by 45% of advisers, as compared with 43% of advisers in 2013. But in second place was the “expected benefit to clients”, cited by 33% of advisers in the most recent study, up a significant 11 percentage points from the 22% of advisers who pointed to client benefits in 2013.

As more firms have established their back-office technologies, and as consumer technology trends continue to the fore, advisers are shifting their focus to improve client experiences. Firms that focus on client experience, in fact, tend to be some of the largest and fastest growing firms in the industry, and their forward-thinking and increased emphasis on becoming more digital could position them to increase their retention rates — and attract new clients — at a faster clip than their peers. Here’s a snapshot at the firms that are prioritizing client experience:

• An overall greater willingness to invest in their technology systems. Firms focused on client experience increased their tech spending by an average of 53% year-over-year, and were much more likely than other firms to indicate that they’d increase spending again in the coming year.
• A greater focus on their clients’ response to their technology, as well as their own in-house integrations. They were far more likely to weigh client satisfaction when evaluating tech (21% vs. 2%) and integration (14% vs. 1%). They were also more likely to have their core technology systems fully integrated (30% vs. 20% of all others).
• They’re mobile power users. We don’t need data to demonstrate the prevalence of mobile technology in today’s landscape. Advisers at client-experience focused firms were much more likely to both have and access their core advisory technology systems from a mobile device than all other firms.
• They have bigger clients, and are more likely to be motivated to make changes to their technology systems to increase capacity than other firms. They’re also open to robo-advice to expand their footprint: 6% of client-experience focused firms offered robo-advice already, vs. just 1% of all other firms. And 13% planned to incorporate in their business soon.

To read the full white paper, “The rise of the digital adviser”, click here and download now.