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Why legacy firms that buy robos in haste show no signs of urgency after they take title

Too much hustle and ambition can be as harmful as too little, according Jasen Yang's closely argued analysis

Thursday, September 1, 2016 – 10:30 PM by Guest Columnist Jasen Yang
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Jasen Yang: When 90% of financial institutions are 'figuring out our strategy,' the process is not working.

Brooke’s Note: Coming in as a guest columnist for RIABiz requires guts. First, we beg you to write. Then we send the goons after you with demands to rework and rewrite. Jasen Yang took on perhaps the toughest issue in the industry — what exactly is becoming of scores of robo-advisors now that they have entered the digestive chambers of just the kind of larger, dumber financial firms that robos set out to interrupt. This column examines how this kind of meal goes through the digester and how it affects the digestee. So far, nothing dispositive. What looks like progress to us bystanders seems to emanate from free-standing VC-backed players like Betterment or giants like Vanguard and Schwab building their own. Thank you, Jasen for giving it a shot and letting us know what’s going on and even offering a way forward.

Legacy financial services firms have been crowing about going robo for so long (“long” being about two years in robo time) that you couldn’t blame a casual business media observer for thinking those efforts have been all but realized.

I’m here to tell you it hasn’t happened. The rumors of such projects’ impact have been greatly exaggerated.

Yes, financial services giants like J.P. Morgan, Goldman Sachs and LPL Financial have declared themselves technology firms and a few big-brand direct-to-consumer companies have launched robo-advisors. The Charles Schwab Co. and The Vanguard Group come to mind. Another blue chip financial services company, Fidelity Investments, is in the process launching its own robo product, Fidelity Go. See: Fidelity launches new robo as Schwab’s hits $8.2 billion in assets.

There have also been some promising partnerships between mammoth firms and startups. Formerly B-to-C robo-advisor SigFig Wealth Management LLC has announced collaboration with UBS LLC and FutureAdvisor is working with LPL, RBC Wealth Management, BBVA Wealth Solutions, and, most recently, US Bank. See: LPL unveils BlackRock’s FutureAdvisor as its robo partner — albeit with LPL model portfolios.

And that’s pretty much been it. We haven’t heard much from Envestnet Inc. since buying “Upside”: or Northwestern Mutual since buying Leanvest. Invesco bought Jemstep, but the industry is waiting to see what transformation results. See: How exactly Invesco plans to get a return on its Jemstep robo purchase with a TAMP-evoking strategy.

Not only have precious few large companies delivered robo-advisors (for the purposes of this discussion, let’s say “large” means any firm with multiple business lines), even fewer have rolled out anything else concrete to digitize their wealth management businesses.

This is Spinal Tap, er, strategy

An astute observer of the wealth-management industry already knows about this technological inertia. What’s less clear is why, aside from generic pronouncements about “slow-moving financial institutions,” this stoppage in play is occurring and what it means for advisors.

As an erstwhile innovator (my company seeks to help wealth and investment managers deliver mass-customized solutions to their clients) I’ve had enough conversations with enough big players to know there are actually plenty of good ideas bouncing around inside the walls of the large incumbent firms. Maybe even too many. Despite this, technology execution isn’t keeping pace.

The most common answer to the question “why?” — and I’ve heard it dozens of times from large incumbents — is that “we’re figuring out our strategy.”

Now, I don’t want to be that cliché of an entrepreneur exhorting firms to take more risks and giving them permission to fail. Being a financial institution doesn’t work like that—risk management is a core function and failure is bad for everyone.

So the first time I heard “we’re figuring out our strategy,” I thought that made sense. Strategy, after all, does take time to implement, establishing constraints and imperatives with folks in technology, compliance, advisors, investment strategy, and marketing. See: Schwab’s Project C now has two tiers and three new names.

But when 90% of financial institutions are “working out strategy,” that’s the process not working.

I think I’ve identified the culprit: mission creep, which is a stumbling block to effective and clear strategy-making whether we’re talking about military, business, or technological initiatives.

Total eclipse of the tech

The cause of the mission creep? Trying to do too many things with technology at once. The blindingly bright promise of digital wealth management will be fully redeemed only when three interrelated, yet discrete, elements are in place and working harmoniously. They are: digital democratization, client access, and bionic advisors.

At first blush, all three sound great. After all, why wouldn’t you broaden your client base, give existing clients more tools, and boost advisor productivity? It’s a gimme. See: How one 'robo-advisor’ got $25 billion on its platform with a Mint.com mindset, 401(k) friendliness, a merger and 16 years of work.

Turns out, however, that these three tent poles require such different types of technological and operational transformation that it’s almost impossible for any firm to do all three at the same time. Indeed, trying to do all three simultaneously is a great way of making sure execution isn’t going to start any time soon.

Standardize and deliver

Let’s take a closer look at why these objectives are so hard to accomplish all at once.

Digital democratization is the use of technology to service both mass-affluent and non-affluent investment customers. This is fundamentally about reducing costs to make small accounts economically viable.

Currently, this translates into (a) standardizing the investment offering to make it easier to understand and easier to deliver; and (b) moving more of the customer service burden onto the clients (who are now entering information themselves) and computers (processing accounts and trading and reporting). See: What exactly to make of Morgan Stanley poaching robo talent Naureen Hassan from Schwab on the heels of Greg Fleming’s departure.

The tricky part here is that you need to develop this new, simplified product offering without creating conflict with traditional advisory businesses. Woe to the digital wealth executive who has to pull off that balancing act while also keeping advisors on their side! See: Thoughts on 'robo-advisors’ served cold, compliments of Kitces and Waymire.

The goal of client access is to create easier ways for the end-investor to obtain account information and increase transparency. At the moment, efforts to weave improved self-service access via web, mobile, tablet, API, chat, and brain wave (for the moment, I’m kidding about that one) into a full-service wealth management offering have nothing in common with the simplifying and standardizing impulse that is necessary for digital democratization.

The technology and user interfaces needed to give clients access to portfolios of managed accounts, mutual funds, alternatives and illiquid assets scattered across retirement, taxable, and trust accounts, are to the pie chart used to illustrate first generation robo-advisors as a Porsche 911 is to a bicycle.

Finally, the bionic advisor, which helps human advisors become more efficient and effective.

Wirehouse and brokerage efforts to improve advisor productivity have to start and end with the fact that the innovation team has a different user than the other two initiatives above — namely the professional financial advisor. See: How to hold 1,000 hands: Robo CEOs lay out a stark choice for traditional advisors at MarketCounsel Summit.

The first rule of digital product management is that your user determines your product. This means that advisor productivity tools have to be all about advisor workflows. Very few advisor pain points relate to the delivery of standardized ETF portfolios, as rebalancing tools for model portfolios have been around for over a decade now. Client reporting tools are a bit more relevant, but some of the most obvious efficiency benefits lie in (a) helping advisors automatically customize solutions for their clients; and (b) in more efficiently handling non-investment-centric customer service requests like account opening, paperwork requests, asset transfers, and handling estate and tax planning information. See: Advisor Tested: eMoney’s automation adds the biggest benefit; account aggregation still building.

Many counties heard from

Trying to accomplish more than one of these objectives at a time leads to institutional paralysis. Here’s why: Implementing anything as broad and high profile as “digital wealth management” in a large company guarantees a ton of internal feedback from the retail channels, its advisory business, the product people, the tech team and senior management representation. Therefore, any plan that comes out of the conference room has to do something for everyone: provide more clients for retail, more clients for advisors, exciting product innovation, cool technology — and costs savings, too!

Unfortunately, when that company finds an innovation partner who genuinely can move them in the right direction, everyone gets back in the room for an update. See: Robo-deal catapults Goldman Sachs into defined contribution business that’s as down market as it gets.

To get all those stakeholders to move forward, everyone’s going to need some incentive. And so the objectives of the engagement end up being broad, making success — or even getting out of the gate — quite difficult. See: Spinning 200+ years of legacy culture as a virtue, BNY Mellon uses Pershing INSITE to show its software side, softer side — as it gets beyond NetX360 and men with a hard-wired approach.

Successive priorities

The best way to bust through such an institutional bottleneck is to recognize that digital wealth management is not a monolith. It’s not a single vendor. It’s not even a single strategy. Curiously, looser coordination between business units can be more efficient than more coordination. This is the same principle behind “agile” software development. The key to successful digital innovation is not to over-optimize strategy around an individual project and to be open to lots of potentially narrow collaborations.

Here’s an example. A partnership that looks like it was started and grown in the right way is pension giant TIAA-CREF’s recent acquisition of portfolio automation-provider, MyVest. in San Francisco. At the time, some outlets reported it as yet another incumbent financial institution acquiring a tech firm, but the real story is actually quite a bit different. TIAA-CREF has a unique advisory model for its members, with each advisor serving almost 700 clients on average, which they accomplish with the assistance of portfolio management automation, including a collaboration with MyVest started way back in 2009.

One can only assume that the partnership deepened over time to the point where an acquisition made strategic sense to both sides. I think the key was starting (relatively) small and well-defined.

Establishing a company strategy for implementing digital wealth services has to involve prioritizing digital democratization, client access and bionic advisors and being satisfied with addressing them one at a time.

Indeed, smaller firms have the edge here by virtue of simply not being able to do everything at one. Thanks to that restriction/advantage, United Capital Advisers and other such players have made faster progress on tech-driven operating models. See: The overnight maturation of In|Vest 2016 was like green bananas going straight to brown for some but Joe Duran made sure it bore fruit.

Similarly, digitally based firms like Wealthfront, Betterment, and Personal Capital have expressed their potential by focusing on their individual flavors of democratization. See: After Schwab and Betterment catch up to Wealthfront’s AUM, the Palo Alto robo pioneer makes a stunning hire.

First things always

Here’s the flip side: For all their flexibility and speed, digital startups can’t and won’t stay relevant if all they offer are click-to-buy portfolios. See: The ironic reason robo-advisors aren’t gorging on assets — a determination to dictate bloodlessly to millennials.

That’s because, over time, legacy companies will reconcile these three objectives. Within five years, the best tech stacks will include far many more sophisticated automated investment offerings than do today’s robo-advisors. Improvements will be less about exotic investment strategies (how often do those work?) and more about automated customization of client issue, incorporating all sorts of details about the client’s situation. See: McKinsey: Robo-advisors have a cloudy future but 'virtual advice’ delivered by 24-hour super-centers with experts and algorithms will win the day.

And, those offerings will be available through client self-service channels, which will render today’s robo-advisors pointless and fit seamlessly into the workflows of advisory practices. See: Online RIAs will mostly fail — and here are 10 reasons why.

For wealth management firms, the critical thing is to get started. Ban mission creep. Prioritize strategic objectives by keeping in mind that one cannot optimize two things at the same time. Break out of the research phase of the digital strategy process and into the execution phase. Develop integration management as a core expertise.

In summary, strategy work should include more than market research and roadmaps. It should prioritize the establishment of a process to run experiments with externally developed solutions. Firms need to design trials that are properly locked down from a regulatory, technology, and client experience perspective, but run them quickly and cheaply to find out what advisors and clients respond to.

Above all, don’t expect one splashy partnership with a startup to check all your boxes. Innovation just doesn’t work like that.

Jasen Yang is founder and CEO of Polly Portfolio Inc., which builds technology for investment firms so they can provide solutions instead of products to individual investors. Contact Jasen at jasen.yang@pollyport.com.

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Lex Sokolin

Lex Sokolin

September 2, 2016 — 12:21 PM

Thoughtful piece. I think you are right that in a way, incumbents should (1) try to do less upfront and (2) do it faster. And indeed this is a cultural issue that is very hard to change. Industry should be launching more attempts, all compliant and discrete, and doing so without as much media pressure. Check out for example E-Trade’s roboadvisor or SoFi’s wealth management arm. These wasn’t as much navel gazing about those initiatives, now they are out, and time will tell how they adjust and change. The other point is that instead of shutting down, start-ups pivot. And they pivot a lot. So instead of shutting down an expensively-wound-up business unit if it doesn’t work according to a 5-year plan, incumbents should flex the resilience and evolution skillsets that entrepreneurs use to survive. Maybe that’s what ENV is doing?

Will Trout

Will Trout

September 2, 2016 — 9:55 AM

Great article, Jasen. You’ve answered the question many people are asking: what happens when the independent robos end up in the belly of the beast? The answer, as you say, is not much. I think your point that “looser coordination between business units can be more efficient than more coordination” is well taken. Of course, most large financial corporations don’t work that way! The way I look at it, the real hitch for these companies in terms of adopting robo is realizing advice consistency across channels (rather than rolling out yet another digital channel)....perhaps more institutional flexibility will be the answer.

Michael Hakerem

Michael Hakerem

September 11, 2016 — 12:51 AM
Great thoughts, Jasen! The true disruption will come only from a cultural shift away from manufacture and distribute (1:Many) to a client-centric (1:1) focus. The greatest financial innovations and solutions are arguably wasted due to the inefficient delivery and constraints of products and product delivery. Finance needs the mentality and fortitude to do something exponentially special as done when the human genome was mapped, 3D Printers used to enhance real lives, and organs transplanted. Still an opportunity when the award-winning FinTech innovators thrive on the mantra of "the greatest sales or prospecting tools ever," or can make their advisor client base seem clever because they can review a family's plan 10 minutes before the annual review and seem fully engaged. Jasen, I can hardly wait to see Polly's next contributions!

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