How Robo Advisory Tools Are Causing Fee Deflation and not Fee Collapse
As always, it’s all about scarcities and productivity
For many years, we heard that robot advisory would kill banks, and cause fee collapse. After five years of advising wealth and asset managers, we have seen a very different picture. Clearly, digital habits changed the behavior of some clients and their advisory nature. Self-service is desired by some. You can scan your items in a supermarket, but you can still cue and have a supermarket cashier taking care of you.
What changed in five years?
We noticed that profitability fell from an 80 basis points to 65 basis points. Robot World charging 0.25% or less did not revolutionize traditional wealth management; managing historically at 1%. Profitability fell but operating profit margins remained quite steady regardless of the size or location of the wealth advisor firm…. with or without MIFID2. Therefore, I’m quite skeptical of the merge, grow or die message we hear every day since MIFID2 in Europe and with the new Swiss LSFIN in Switzerland. Most companies we are working with are working in a low fee environment for many years now… The next frontier is not fees decrease, it’s economy of scale and domino effect. Firms want to build their fintech Appstore. Firms want to connect to cold storage solutions for crypto trading. Firms want to onboard clients like a neo-bank. Wealth and asset managers to become what we call today banks? Gartner said that most banks will be made irrelevant by 2030
Would fees increase again? Perhaps. We have seen an increasing demand for high-quality and complex services. The fee increased in the internet SAAS business when customers were seriously upset. (Something, I would suggest to a firm offering the Revolution to a debit card). Race for new yields and little engagement in the equity bull rally turned banks and advisory firms to offer real estate synthetics and private equity to anyone… Yield, risk, service quality or firm profitably?
Clean, transparent, plug and invest
The cost of doing business is driven by the offset of non-core operations. From the UK, France, to Singapore, we are seeing clients using third-party chief investment officers – externalizing as much as possible investment process and levering robot techniques to rebalance portfolios at once. This trend is not fee compression but fee deflation!
Another reason for the externalized resources is the lack of talents. In Switzerland, we clearly face a serious problem: bankers are melting like our glaciers! How to regenerate a population of aging wealth and asset managers? Switzerland is not the only place where this talent shortage is blatant. In the United States, CFP certificates are severely lacking too.
This is quite ironic, the potential threat to the profitability of advisory firms today is not the “RAISE” of the robot advisor nor fee compression but simply the fact that there are not enough financial advisors to aggregate and grow the capital.
In France, MIF & “trading-related tax incentives” are pushing wealth managers to connect themselves to externalized allocators, limiting their universe to authorized securities, carefully curating “clean shares” from pre-approved assurance companies. What a world of transparency. In France, if you wish to invest in a tax-optimized US equity fund, you can choose only two funds! Therefore, wealth managers are rebuilding model portfolios into SMA separately managed methods. InvestGlass is used as a link between manufacturers of ETF, allocators of models, wealth managers, and their custodian/insurance companies: a transparent model portfolio produced in Nice, managed in Lyon and sold in Paris with a settlement in Luxembourg. What a jumping rope synchronization…
In Switzerland, fear of LSFIN is pushing wealth and asset managers to equip themselves with digital solutions. M&A operations are clearly a trend here for smaller firms being tucked into larger wealth managers. This trend is not always a guarantee of the economy of scale. The trend is set for larger blends and no firm below EUR 50 million could survive in a MIFID environment however we think that getting an InvestGlass EUR 3’000 per year will get your productivity level quite far. No need to reach EUR 2 billion under management.
Workflow Optimized to Help you Save Time
We foresee four trends, the first is going to be connectivity. Across the wealth management firm you are going to see people doing due diligence and exchanging notes and a selected list of securities. They need tools to be ready on the field. Then you have the CIO or allocator team-building model portfolios. You can do it into InvestGlass with our fintech-regulated CIOs and then exchange them across different members of your team. This trend could reach a point where each client has his own robot advisory model. Something we could call separately centralized advisory. “SCA”. This makes the process more seamless, moving you out of emails and excel where information gets stale and people get frustrated. Then you see the A.I part, where data is leveraged to enhance and customized each investor experience. The modularity of widgets coupled with AI offers a truly unique experience. The last trend is risk analytics, where we leverage a web-based tool and more A.I. to reveal regulatory blind spots. Automated workflow is a response to improve your team productivity.
What do you think? Are you seeing the same pattern in your firm?