What is the cost of doing nothing?

The title of this piece says it all. But let’s put this into a business context and let’s be even more granular and place focus on the wealth management industry and where the trend is currently heading with respect to serving clients and profitability.

If you haven’t been sleeping under a rock for the past 24 months or so, you would know that robo-advisory has absolutely taken off in most industrialized parts of the world and will soon take off in Asia. Why is this trend taking place?

The answer is quite simple. Robo-advisors were not created just to sell passive investing strategies for reduced management fees. That’s just window dressing. Robos were designed to overcome the typical customer experience specifically within the “under-served,” segment.

The problem that exists lies with the perception of value. Most investors were allocated towards a variation of a passive long-term investment portfolio and asked to continuously contribute over the years to strive towards their retirement goals. Typically, an investor would only hear from his/her advisor once a year or less. That once a year touch point fuels the cheap robo-advice that is coming online. It’s not the passive investment strategy an investor seeks with a low price point; it is the low price point being sought for the same level of service and passive investment strategy historically experienced by the investor. Financial institutions made the decision to enable robo-advice and service the “under-served,” customer segment. This segment is very retail and typically does not have the equity or buying power to warrant a more premium type service. The robo-advisor service keeps this customer segment consuming product and paying fees; albeit at lower levels but lower is better than zero as there is a risk that the customer will walk across the street to another FI and use their robo. Keeping the customer locked into the service buys the FI time to figure out the future strategy for this customer segment. If the customer walks, then, you can say good-bye to loans, mortgages, insurance, lines-of-credit, etc. What does this have to do with the cost of not doing anything? Everything.

Recently, I met with a regional bank and brokerage company. The services offered are vanilla and carried little to no USP. Depth of services offered to a customer were significantly less than international players and other regional banks. Couple that with higher transaction costs and it will only be a matter of time before the business unit will be sold off at a much lower valuation. In Asia, the culture is weighted more towards a transaction-based environment versus a fee-based environment. Things are changing; just at a “relaxed” pace. The business being referred to relies heavily on transactions and in a margin compressed environment, profitability can only decrease especially if customer acquisition is low and revenue relies on self-directed /initiated transactions. It’s a very difficult business environment to be in. The business is at the mercy of the client’s appetite to transact.

For a business case like this, a robo-advisor is a very logical solution. Of course, investment into marketing and client education will be required; however, adoption into passive portfolio strategies priced very attractively encourages the client to adopt and ensures constant revenue. The constant revenue is one of the critical points as transaction revenue on a retail level is determined by market dynamics. In a bull market, a retail investor will typically transact more often. In a consolidating or bear market, transaction levels decline significantly. By adopting a robo-advisor, the revenue stream will be more consistent and predictable. Additionally, the client will have a lower propensity to leave for better service and/or pricing from competitors.

So, what is the cost of doing nothing? In this case and based on current trends, it is the difference of modernizing the business, meeting client demand, creating consistent revenue or have a long-standing business slowly fade and exit stage left.

Jovin Shen

Head of Sales & Marketing

Jovin's LinkedIn Page

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