Skip to main content

Hybrid Advice creates opportunities, but also Client Retention problems

27th May 2024 – The expanding robo-advice market is increasingly blurring the lines between digital and human advisory services, creating opportunities for firms that effectively integrate these offerings. In an insightful interview with The Globe and Mail, Roger Portnoy provides key perspectives on this topic!

the globe and mail

A growing robo-advice market is blurring the lines between digital and human advice,creating opportunities for firms that integrate their offerings and move clients from one stream to the other.

Some wealth management firms are experimenting with robo-advisors to manage small accounts, according to a report from Toronto-based research firm Investor Economics, an ISS Market Intelligence business. In this scenario, which the report calls the “digital detour,” investment companies use robo-advisors to serve clients with smaller balances and simpler needs while managing advisor capacity.

However, this approach has created a potential client retention problem.

“Some of the traditional investment firms have built these digital offerings off the side and haven’t figured out how to integrate them with their existing offers,” says Kevin Spraggs, vice-president of research at Investor Economics. After a decade of serving Canadian investors, the robo-advisor market is still relatively small, according to the report, with less than $24-billion of assets under management, as of September. That represents just 0.4 per cent of the $6.5-trillion in financial wealth in this country, Mr. Spraggs says. Still, he notes, this subsector has experienced a 32 per cent annual compounded growth rate during the past four years.

As the robo-advice market grows, the lines between digital and human advice will continue to blur, the Investor Economics report says.

“Robo-advisors have thus far failed to attract large amounts of assets, and large wealth [management] firms have struggled to integrate robo-advisors into their advice offerings, whether as a channel on the progression pathway or as an advisor-assistance tool,” the report says.

“That said, robo-advisors have acted as disruptors through ushering in a new digital age to the wealth management business.” Part of the reason robo-advisors haven’t taken off in Canada, Mr. Spraggs says, is the strong position of the banks.

“The banks cross-sell wealth to every Canadian with a checking account and have been very shrewd at developing a powerful progression pathway that moves clients through the bank to the channel that best fits their wealth and needs.”

Banks have also adopted the technology themselves, often partnering with robo-advisor providers that are pursuing business-to-business models, says Roger Portnoy, chief strategy officer at Milan, Italy-based wealth management tech company Objectway. In January, the firm expanded into North America with the acquisition of Canadian roboadvisor Nest Wealth. Partnerships with robo-advisor fintech companies can benefit advisors and wealth managers, Mr. Portnoy says.

“Given that many robo-advisor firms have been moving from a pure B2C [direct to client] toward a B2B [business-to-business] model, financial advisors who have simpler clients in the wealth accumulation stage are seeing a well-diversified [and] ESG-friendly roboadvisor provider increasingly as an outsourcing investment management partner,” he says.

But wealth management firms must create a clear progression pathway of their own or risk losing those clients as they mature, Mr. Spraggs says. Adding to the challenge, traditional robo-advisor platforms are scaling up their human advice offering and becoming more hybrid, the Investor Economics report says. To retain clients, wealth management firms and advisors must create more integrated robo-advisor models that support clients through different stages of their investment journey.

“We envision the independent firms trying to replicate a progression pathway model in which they use digital as a base, potentially as a small account strategy,” Mr. Spraggs says.

“They can then add hybrid elements on top of it and move people through to a full advisor relationship and to a high-net-worth offer as the clients grow their wealth.”

Clients might start with a self-directed, digital-only service and progress to a hybrid model with access to salaried advisors once they have around $250,000 in assets, for example. Once they cross the $500,000 threshold, the report says, they would be assigned a dedicated advisor while retaining the full suite of digital planning tools. The top tier would receive the holistic wealth treatment. Unlocking more of these features for clients with larger portfolios and more complex needs will help advisors retain them while using technology to help serve them, Mr.Spraggs says.

Generative AI to the rescue?

Mr. Portnoy envisages generative artificial intelligence as a way to create even tighter integration between human-like elements and robo-advice services. This technology, epitomized by ChatGPT, synthesizes existing information to generate content automatically. It’s being used increasingly in chatbots and other customer-facing applications.

“Gen AI as a client engagement solution has the potential to change the way a personalized fact-find – and full client onboarding toward planning and investment proposal – is done,” he says. “That, in turn, will allow advisors to manage more clients when they need assistance.”

There’s plenty of work to do, Mr. Spraggs concludes: “The wealth [management] industry, in general, is playing a bit of catch-up compared with some other industries that have led the digital experience movement.”