By Mike Foy, Senior Director, Wealth Management Practice, J.D. Power
Contrary to the doomsday scenarios for a robo-revolution, wealth managers are not on their way out. Far from it. For evidence of this, look no further than a trend that’s developing with the generation poised to inherit a significant portion of the estimated $30 trillion great wealth transfer. Yes, the Millennials, that group of investors everyone thought would trade their conventional wealth managers for apps on their smartphones, actually craves more contact with advisors.
According to recent J.D. Power research, among the emerging affluent segment of investors with a full-service financial advisor, which includes Millennials that have $100,000 or more in investible assets, 31% say they would like to have more contact with their FA, compared with just 7% among older investors. What’s more, this group of young investors already averages 4.5 advisor contacts per year versus 3.6 contacts per year among other generational groups.
That does not mean wealth management firms should scrap their digital efforts.
While there is still a critical function for professional advisors in the Millennial investor tool kit, those advisors won’t be alone. Tech will play a big role. Already, 25% of those in this demographic with an advisor have also tried a robo-advice platform, and 41% indicate they would use one if their financial firm provided one, as most are now doing.
While some investors are undoubtedly just interested in trying a new technology, the most common reason among Millennials for trying robo-advice technology is lower fees. While just 12% of all investors currently feel a robo-advisor could be a replacement for a human advisor, that increases to 32% among Millennials.
Further, there is a risk that if investors initially diversify to reduce fees, it sets up a scenario in which advisors whose value proposition is primarily based on producing returns run the ongoing risk of being continuously evaluated against robos on portfolio performance, and having to justify their higher fees in light of perceived comparable or better performance during certain periods. Firms might see client assets move from higher revenue producing advisory relationships to lower revenue producing digital advice models, or worse yet out the door to a third party robo provider.
Complicating things further, today’s full-service Millennials are most likely to indicate their intent to consider leaving their firms (44%) when they are using self-service mobile tools and advisor communication fails to meet their expectation. By contrast, when advisors deliver frequent, effective communication and show progress toward goals, Millennial likelihood of switching drops to just 17%.
What’s this all mean for the wealth management industry?
It’s become increasingly clear that the path to success with the Millennial customer segment is going to be determined by wealth managers’ ability to achieve the right formula of high tech, high touch client service. Ultimately, what we’re seeing in the data is that a compelling digital experience is critical to informing younger investors’ firm selection and increasing their satisfaction scores, but it does not breed loyalty. Lasting loyalty and advocacy come from the advisor relationship.
To prepare for this digital transformation, full-service advisory firms need to start embracing the power of human and robo advisors working together. Traditional wealth management firms can mitigate the risk of losing out to lower cost digital models by successfully integrating technology with human contact in areas where technology will not replace it. They will need to attract advisors with the right skills and empower them with the right tools and training to deliver frequent, meaningful client communication – not just by in-office visits or phone calls, but by utilizing emerging channels like texting, social media, and video. They will need to effectively assist clients in setting personal financial goals, establishing a strategy to meet those goals and empowering investors to track progress on an ongoing basis. They will also need to help educate their clients and provide transparency around investment performance, fees, and available resources.
In the end, the digital revolution in wealth management will not be a man versus machine standoff, it will be a race to build the best omni-channel experience that leverages the best of both worlds to deliver superior customer experience.