Client Service August 10, 2016

Traditional Advisers Can Learn from ‘Robos’ on the Rise

Robo-advisers are growing by providing user-friendly, responsive and automated services to well-defined groups of investors. 
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Automated portfolio management platforms, or robo-advisers, are rapidly winning a sizable share of traditional advisory clients, from high-net worth retail investors to defined contribution retirement plans.

Their presence in the marketplace has reached the point where traditional financial advisory firms can no longer just brush them off, according to Hearts & Wallets research. Traditional firms should instead focus on learning from the successes and failures of early robo-adviser entrants, a new white paper from the firm argues, looking for opportunities to take the best of both approaches. 

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The Hearts & Wallets white paper looks at a number of recent developments in the robo-space to make the case. Recently, Fidelity GO was released, offering a mix of algorithm-based investment advice and insight from human advisers. Another hybrid service examined is Vanguard’s Personal Advisor Services. Since launching in May 2015, it has accumulated more than $45 billion in assets to become one of the leading players in the robo-adviser space. The biggest independent robo-adviser is Betterment with $4.8 billion in assets—an increase of 300% from its levels at the start of 2015.

According to Hello Wallet, consensus is building that consumers prefer these services because they offer user-friendly and personalized platforms to manage and track assets, as well as transparent fees. Not surprisingly, robo-advisers are attracting tech-savvy millennial investors who value responsive design, Hearts & Wallets finds. Citing 2015 focus groups conducted by the firm, Hearts & Wallets quotes one investor who said he liked, for instance, that “Betterment showed you a preview of what the interface looks like that you’d actually be dealing with.”

Another said, “I like Personal Capital’s dashboard tool a lot. I think it’s just a really nice, clean, interface, and it also tracks your net worth, just like Mint, which is, for me, the most useful thing right now.”

Aggregating and monitoring cash flows is an emerging client need that robo-advisers have been excelling at meeting, according to a Hearts & Wallets’ “News Needs Framework” report. Fifty-one percent of respondents said they needed help in this area.

NEXT: Where robos are excelling 

Hearts & Wallets found that another point of recent success for robo-advisers is their willingness to start a client relationship without necessarily first gaining any real wallet share: “Rather than requiring large starting account balances and reams of paperwork, robo-advisers begin with small tasks such as signing up for free emails, setting up an un-funded account or paying a flat fee. Furthermore, a clear value proposition and highly-tailored investment strategies have also shifted more investors toward these new entrants.”  

One respondent told Hearts & Wallets, “I got a more homey vibe from [Personal Capital] ... I’m assuming they’re going to ask me a ton of questions about myself before telling me to put all my money somewhere.” Another respondent said he valued transparency when it came to fees by WealthFront. “I knew what I was getting myself into.”

Contrary to what traditional advisers might assume, the research also shows that digital tools are “resonating most with investors who have at least $100,000 in investible assets.” According to Hearts & Wallets, more than half of retail investors with assets of $100,000 to $2 million cite strong interest in online tools, websites and Web applications as sources for information and advice.

Related to all of this is the wider trend in all forms of retail and services, whether financial advice or anything else, for more responsive user-control. According to a quantitative analysis by Hearts & Wallets, more than 70% of respondents said they want to “make decisions and manage money on my own,” whatever form of advice they prefer. Most investors, the research found, use technology and live advice together with frequencies varying depending on the segment of investor.   

Providing support via multiple channels—i.e., automated portfolio management complemented by access to an individual adviser or call center—can be particularly useful, considering 62% of respondents said they need interpersonal motivation to take actions such as saving and investing more. The research shows the desire for help with determining financial actions is fairly even across wealth and age segments. 

“This provides advisers with an opportunity to offer more useful and actionable sources of information via their digital-advising products,” the research concludes. 

Additional information and research are available at www.heartsandwallets.com.

Data & Research August 10, 2016

Advisers Have Opportunities to Reach Generations Saving for Retirement

Among all generations, financial advisers are considered the most valuable source of financial advice, according to a study from Principal.
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When older generations, particularly Baby Boomers, hear the term “retirement plan,” it likely conjures up visions of long-term strategy, spreadsheets, and precise calculations; however, a  study from Principal found that this is largely not the case for Millennials, who are more likely to associate the term “retirement plan” with saving money.

According to the research paper, “Filling the financial knowledge gap for all generations,” 57% of Millennials think a retirement plan is simply putting money away. Another 14% define it as “saving a certain amount” and 10% say it involves general steps that need to be taken in order to retire one day.

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None of these definitions involve strategy, ordered steps, long- or short-term goals, or specific target numbers, Principal notes. Essentially 81% of Millennials are shooting in the dark toward a large but mostly theoretical target called “retirement.”

Principal says there is a big opportunity here for financial planning professionals when a large segment of a sizeable generation knows they should be heading toward a goal but have no idea how to get there. This also presents opportunities for employers to design employee training around company retirement plans where even basic training on personal finances would be of great value to employees, particularly Millennial employees.

The study found Millennials use professional financial advisers less frequently than Boomers, but they are much more open to discussing personal finances with them. Two-thirds (67%) of Millennials say they are comfortable discussing personal finances with a financial adviser compared to 59% of Boomers. This trend of openness increases even more sharply with other groups, with 68% of Millennials saying they are comfortable discussing personal finances with parents, compared to only 35% of Boomers. In addition, while only 26% of Boomers say they are comfortable discussing their personal finances with close riends, 51% of Millennials are comfortable with this.

Principal says Millennials’ lack of participation in the financial services industry is not due to disinterest, but instead due to their misperceptions toward the industry and untapped opportunity on the part of both the industry as a whole and individual professionals themselves. The fact that Millennials are so open is an invitation to the financial services industry to meet them where they are and start financial discussions pertinent to their life stage and level of knowledge.

NEXT: Where all generations need knowledge

The study found that Boomers, Gen Xers, and Millennials have the same top three areas where they feel they lack the most knowledge or education. Top on the list for all three generations is how to choose smart investments. This is the area that 19% of both Boomers and Gen Xers and 16% of Millennials list as what they know the least about.

The next topic where people feel they lack knowledge and understanding is how to branch out into less traditional investments such as commodities, real estate, private equity, etc. Fifteen percent of both Boomers and Gen Xers and 13% of Millennials put this at the top of their list.

Gen Xers feel the strongest about how to prepare for retirement, with 16% citing this as the area where they lack the most knowledge. Fifteen percent of Boomers and 12% of Millennials agree.

And last on the list, but still a top area of concern, is how to structure a portfolio. This is the topic that 13% of Boomers, 11% of Gen Xers, and 12% of Millennials feel to be the one that they lack the most knowledge or education about.

NEXT: The value of online tools and financial advisers

The study found that there are several specific areas where the majority of people think an online tool would be a valuable way to have various aspects of retirement explained and specific questions answered.

At the top of this list is how to calculate what will be needed in retirement, where 80% of employees said this would be valuable to have explained in plain language by an online resource. Equally appealing is an explanation of how to build a unique retirement plan specific to a person’s situation with target goals and steps to reach retirement. Eighty percent of employees also said this would be valuable to have explained with an online tool.

While all the generations say they could find benefit in online tools, the breakdown by generation is slightly different when it comes to who currently uses an online tool for personal finances or financial planning. Younger generations are more likely to be using these tools, with 44% of Millennials and 42% of Gen Xers saying they currently do, compared to 33% of Boomers. The study revealed that younger generations are very likely to consider an online tool to be their financial plan: 71% of Gen Xers and 70% of Millennials say this is true compared to 53% of Boomers.

The study found that financial advisers are considered the most valuable source of financial advice by a long shot. Thirty percent of respondents list a financial adviser as their most valuable source of advice.

Principal says this spells opportunity for financial advisers in the form of people looking for financial advice but not yet engaging with a professional financial services provider. This also details an opportunity for employers to meet this need for employees by offering education around the financial plans their company offers. Training or education sessions with a financial services provider do not need to be frequent in order to become valuable for employees.

The paper is the first to be published on a new insights hub launched by Principal, which sheds light on the generational differences when it comes to money. Principal is going to continue to update principal.com/generations with new research, insights and perspectives.

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