In “Automating Advice: How Online Firms Are Disrupting the Market for Online Advice,” Celent researchers suggest traditional providers of financial advice must change the way they do business or face radical disruption in client prospecting and retention efforts. Online firms have gained significant market traction in the last five years, according to the report, most notably in the domain of investment advice and passive portfolio management.
Online firms appear to be particularly well suited to deliver investment-oriented services because of the fragmentation of traditional delivery models and the adoption of passive investing strategies, which can be delivered effectively in the way of model portfolios and rebalancing algorithms. There is also the potential for disruption in the areas of personal financial management and personalized financial planning, the report says.
Specific to retirement advice, there appears to be increasing digital competition for managed account services (see “Software Firm Wants to Disrupt DC Industry”).
Celent researchers find low-cost online providers of financial advice have a value proposition that resonates among lower-income and younger-generation investors, especially Millennials and those in Generation X. These groups still value face-to-face contact with professional service providers, but they are also more familiar with conducting important financial tasks online.
The report suggests many traditional advice providers have responded to the online adviser threat by moving up market, targeting more affluent investors who value in-person meetings and highly individualized service. However, Celent warns this strategy may offer only temporary respite as online advice providers become more sophisticated and younger generations of investors secure more wealth.
The report also discusses a variety of ways firms can abandon this defensive crouch, mainly by building on their inherent competitive advantages that cannot necessarily be matched by inexpensive online advice. For instance, firms that specialize in holistic financial planning and highly customized investment approaches may find it easier to out-sell online advisers. Again, Celent warns that even this approach may fail in the long run as online advice models are improved by innovative digital providers.
“Traditional advisers and the financial institutions that employ them must put aside legacy practices to deliver digitized advice and, ultimately, digital relationships,” says William Trout, senior analyst with Celent’s securities and investments group. “In short, they need to take a page out the book being written by the automated providers.”
Celent also suggests there is an ongoing convergence taking place as investment services providers increasingly embrace the concepts of individualized financial planning and personal financial management. This move could challenge the success of both online and real life advisers, Celent warns.
The abstract of the report, as well as information on how to obtain a full copy, is here.