Robo advisors and the Dutch banks: Strategically ignoring the hype or waiting for maturity?

Part 2 in the Retail Investor series

There is a legion of robo advisors available for the retail investor, whether it be directly offered domestically or internationally. And although it is a typical value proposition offered by FinTechs, these innovative “online, inventive, or digital stewards of wealth,” are also offered by the world’s largest asset management companies (e.g., BlackRock, Morgan Stanley, and Vanguard). The Netherlands is considered one of the most innovative countries in the world in the financial sector. So surely there must be a reason why these services are not offered by any of the large Dutch banks (at least not actively advertised)?

What is a robo advisor?

Robo advisors come in different shapes and sizes, making a single definition somewhat troublesome. They are best described as automated digital financial management tools to help investors manage their portfolios with moderate to minimal human involvement (from the bank). Their advice is built on algorithms or rules, which are fed by a questionnaire about the investor’s preferences (think about risk profile, resources, goals, etc.).

What are the advantages and disadvantages of robo advisors?

By automating the digital advice and portfolio management functions, organizations and investors can benefit from much lower fees than what traditional wealth management firms would charge. Better yet, as a result of the cost infrastructure, e.g. lack of human advisors or intervention, the service is no longer exclusively available to HNWIs (high-net-worth individuals) due to a large minimum investment. Instead, it becomes accessible to ordinary retail investors with a minimum investment of a few hundred euros. Finally, these robo advisor services are often digitally well-designed from a customer journey perspective. Everything can be managed online, from changing your preferences to gaining insights in the asset classes and returns of your portfolio.

Robo advisors also have some disadvantages. These services are not 100% personalized (yet). Even though an investor’s main concern is the desired returns, humans always have specific and different needs, which they want to express with another human, to feel understood or assured. There are no face-to-face meetings with a robo advisor. When the market suddenly expresses a drastic correction, the robo advisor will not calm you down with its experience and knowledge on how financial markets work.

In which context are robo advisors relevant?

To fully understand the context for robo advisors, see the investment options below. Robo advisors are especially relevant in the latter two categories (see explanations below):

Usually when people start to invest, they start small and just try their luck by themselves. Often, simple financial instruments, such as stocks, are chosen. This is also known as execution-only investing. Guided investing, or investing in index funds or mutual funds, is particularly easy since investors do not have to look back often or make big decisions (e.g., they just follow the index). So far, banks don’t offer actual advice during investment decisions. The next categories, personal banking and wealth management, can have many different names and forms, often with many varieties and different limits. Personal banking is often investing with advice from an advisor with a minimum investment (limits/naming can differ among banks). You can choose to receive advice or fully trust the advisor; either way, a team of experts will manage your portfolio and potentially offer additional  services too. The last category is also known as private banking. Often, these services are offered for the wealthy (HNWIs). Wealth management firms are highly specialized, with an expert team of bankers that cater to a larger set of needs of HNWIs from an investment and lifecycle perspective.

Are robo advisors a hype or are Dutch banks missing an opportunity?

The high fees mostly explain why wealth management has a large minimum investment, which is often charged every quarter based on a percentage of the assets under management. And while many wealth management firms have been able to quickly adapt to a new online or digital business in these turbulent times (Financial Times), according to the Capgemini Wealth Report (2020), “wealth managers must navigate an uncharted, post-pandemic world without a playbook.” The unusual events of this year have caused investors to critically assess their traditional wealth managers, especially scrutinizing two subjects: advisory fees and personalized services/advice along the customer journey. Data from the report supports these findings (poll results gathered by more than 2,500 investors):

• 33% of all respondents said they were uncomfortable with the fees wealth firms charged.

This is especially true given growing concerns in volatile financial markets and growing expectations. Additionally, the gap between existing and desired states merits further consideration since:

• 22% of HNWIs say they plan to change their primary wealth manager.

A top reason for a switch is the high fees. The obvious question then is, if robo advisors can also offer wealth management services at lower fees, why does it seem that they have not been widely accepted by top Dutch banks? The answer probably lies in the quest for hyper-personalized client expectations. Investors not only seek a reasonable amount of return, they also desire value-added services and are willing to pay extra for it (e.g., wealth transfer and inheritance management). Unfortunately, current robo advisors are not yet capable of doing so. They have been adopted by some European banks, and these automated services have greatly helped with the surge of new customers in March, but we’re not there yet. However:

• 74% of investors are likely to consider BigTech wealth management services.

Robo advisors have the potential to offer financial well-being services, currently limited to HNWIs, to average retail investors. However, hyper-personalization is the missing link and probably needs data-driven capabilities. Google has already launched Google Pay, and we know BigTech can do almost anything with data. Survey results have pointed out that 74% of the surveyed investors are interested in BigTech. This may pose a real threat to current financial institutions. What if Google would not only deliver wealth management services, potentially through robo advisors, at low cost/prices and great accessibility to all (not just HNWIs). If no action is taken, current financial institutions may very well lose clients to FinTechs and BigTechs (as survey results have indicated). Keeping investors satisfied with sustainable investments alone might not be a durable growth strategy in the foreseeable future.

What’s next?

In the next article we will explore the future of investment management. If you are interested in this topic, connect with me on LinkedIn.