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Scaling up robo-advice: Lessons from online supermarkets

Standalone robo-advisors (‘robos’) must find other ways to demonstrate value to clients – a low cost offering isn’t enough to stand out in the market.

Standalone robo-advisors in this context are pure-play robos who offer only online and automated wealth management service via algorithm-based portfolio management with little human interaction. For such low cost, low margin business models, scale is everything. But to achieve scale, robos must demonstrate value to their customers.

Note the similarities between this business model and an online supermarket (online retailers). Discounting other factors, such as distribution logistics and differences in regulations, the fundamentals are the same: a commoditised online offering with no ‘human touch’ at the point of sale. Even consumer demographics are similar – young, tech-savvy professionals, looking for cheaper, easy-to-use and anytime/anywhere self-service options.

Online supermarkets use extensive segmentation analysis and branding to acquire and retain customers. A seamless integration of data, analytics and technology enables a personalised shopping experience. Furthermore, exciting loyalty schemes and slick distribution services all add value and drive up volume. For example, Ocado, an online supermarket, has successfully leveraged technology and data analytics to provide a personalised shopping experience; prompting high preference items to shopping baskets and delivery preferences, from historical transactions.

So, what can pure-play robo-advisors learn from online supermarkets?

Robos must consider leveraging data analytics and Artificial Intelligence (AI) to offer a more personalised client experience. For example, Wealthfront analyses historical transactions using AI to track account activity and apply behaviours to investing. It also uses digital technologies and Application Programme Interfaces (APIs) integration1 with companies such as Venmo to track spending behaviours. Robos can also consider prompting events, such as portfolio gains and losses due to sudden market movements or, reminders to top-up funds. Features such as online help-chats and knowledge tools like ETF research and investment news can further improve the overall client experience. Client advocacy can also be a powerful way of growing volume. For example, robos can feature referral schemes similar to the ‘invite a friend’ offered by Ocado.

On the pricing front, online supermarkets enjoy more flexibility when adjusting price points to suit demand. On the other hand, robos use a simple and transparent pricing, i.e. fee on assets. Stringent regulations leave robos little room for frequent price adjustments. Therefore scale becomes an even more important lever to sustain the top line.

Robos can grow volume by using segmentation techniques to offer tailored services to clients. The mass affluent segment is a ‘sweet spot’ for robos with three-quarters2 of robo users in the US having less than $500,000 in total investable assets. Robos must consider adopting some of the above strategies to gain a critical mass in this segment. The affluent segment has complex investment needs, so robos can offer premium services to entice clients, such as tax-loss harvesting offered by Betterment and Wealthfront. The high-net-worth segment trades on relationship-led holistic financial planning advice. Pure play robos will find it an uphill task to compete with big players such as Vanguard, which offers an in-house robot-human hybrid3 via its Personal Advisor Services. To compete, robos must find unique ways of differentiating – a strong brand with ethos and values-led investing, as an example.

With all this in mind, how do you balance the need to scale versus the ability to add value? And how will standalone robos evolve in order to survive – by piling high and selling cheap, or by moving into the high end ‘personal shopper space’? Walmart or Saks Fifth Avenue? Tell us what you think robo-advisors can learn from the online retailers.

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References:

  1. http://wealthmanagement.com/technology/wealthfront-turns-artificial-intelligence-improve-robo-advice
  2. http://www.marketstrategies.com/news/2516/1/Cogent-Reports--Use-of-and-Interest-In-Robo-Advisors-Soars-Among-Investors.aspx
  3. http://www.marketwatch.com/story/heres-the-advice-you-get-from-vanguards-new-robot-human-hybrid-2015-05-18
  4. https://www.ocado.com/webshop/startWebshop.do
 
 
 
 
 
 

About the Author

bhanu shukla

Bhanu Shukla is a Senior Consultant with strategy and business transformation experience in the wealth and asset management and banking sectors. Bhanu has been instrumental in driving revenue enhancement, profitability improvement and complex regulatory-driven transformation initiatives for wealth management clients. His interests also lie in the adoption of new technologies for disruptive innovation in the financial services industry.

 
 
 

The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.