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Defeating Robo-Advisers Will Take More than a Pulse

November 8, 2013 by JP Nicols

A “robo-adviser” joined MoneyGuidePro founder and chief executive Bob Curtis on stage at this week’s T3 Enterprise conference and proceeded to melt down when Mr. Curtis asked it qualitative questions like “I’m worried I won’t be able to retire when I planned, can you help me with that?”

During his opening keynote, Mr. Curtis was speaking about the future of advice delivery and digital disruption, when a colleague in a silver robot costume shuffled to the stage as rock band Styx’s “Mr. Roboto” provided the appropriate theme music. The robo-adviser recited its advantages such as “You can call me at 3 a.m., I never sleep.” In a robotic voice, naturally.

I suspect that many advisers were initially chuckling in comfort as Mr. Curtis overloaded the droid’s circuits by asking follow-up questions, but that comfort didn’t last long. He then warned of the constantly improving capabilities of the more tech-centric firms, which will increasingly be able to provide answers to more and more complex questions. More importantly, he correctly described how they’re raising the bar for clients’ expectations about investment firms’ client-facing technology.

Competing with the Robo-Advisers

More than one presentation at T3 mentioned competing with robo-advisers. I did not coin that moniker, which some have taken to be derisive, and I am not anti-robo. I am a fan of any approach that uses technology to make advice delivery more widely available and comprehensive at the same time. Though catchy, the term is not even very accurate for most firms it’s been used to describe — most are RIAs with real, live strategists and sometimes even real, live advisers and financial planners.

Yes, they have web portals and mobile apps and model portfolios and interactive planning tools, but so does nearly every other firm. The big difference is that they designed their client experience around the latest innovations and built their internal processes around that, rather than bolting new technology onto 1970s architecture and processes.

Their technology also allows them to start a relationship with an aggregated view of their clients’ total holdings, as Mr. Curtis pointed out. That’s a claim that only 10% of advisers can make today, according to CEB TowerGroup.

More Than Just a Pulse

I am certainly not anti-adviser either. As technology-oriented as I am, I cannot envision a future that doesn’t have live financial advisers, but many will have to change to compete in the future. Especially in a world in which 68% of advisers rate their own technology as “fair” or worse, and 63% rate the integration of their tools the same way, according to Patrick Yip from Pershing and David McClellan from Albridge Solutions Inc.

The real challenge goes deeper than just technology, though. I have heard advisers dismiss their cyber challengers with arguments that are flimsy and often just plain wrong.

“My clients aren’t that tech-savvy”, they say, or “My clients want to talk to a real person.” Those points may be true in certain instances, but advisers will need more than just a pulse to compete with and beat the robos.

In other words, the mere fact that you’re human being isn’t a sustainable competitive advantage. Yes, some clients are technophobic, but most learn to appreciate the efficiency and 24/7 availability that technology can provide, not to mention the very real cost efficiencies. Advisers still have the edge in emotional intelligence and the ability to help protect clients from their own worst instincts, but they will need to make the best use of those advantages to create real value on the clients’ terms. As InStream chief executive Alex Murguía put it, “My clients don’t need a friend, they need an adviser.”

Remember, as science fiction author (and coiner of the term cyberspace) William Gibson famously said, “The future is already here — it’s just not very evenly distributed.”

(This post originally appeared on my TechTalk blog at InvestmentNews.com)

How Banks Can Compete in The Future

October 28, 2013 by JP Nicols

Back in 1995 Michael Treacy and Fred Wiersema wrote a book called The Discipline of Market Leaders, and in it, they broke down the three critical strategic domains of any business– Customer Intimacy, Product Leadership and Operational Excellence.

They argued that companies couldn’t really dominate in more than one. None of these are exactly optional, but their research suggested that companies should focus on truly mastering just one of the domains and partnering or subcontracting with others in the areas where they couldn’t dominate.

A few years later, John Hagel and Marc Singer from McKinsey & Company came to a similar conclusion in their Harvard Business Review piece Unbundling the Corporation. They even used very similar wording (Customer Relationship Management, Product Innovation and Infrastructure Management) to describe the domains.

The chart below combines the two concepts to show just how similar they are (Treacy and Wiersema are in blue text).

They both suggest kind of a Strengths Based Leadership approach for companies– improve your weaknesses enough to prevent failure, but the focus on your strengths to achieve greatness.

Implications for Financial Services

So, what kind of business is banking?

Some banks may indeed stay in the infrastructure management business, and even double down on the strategy. The basic machinery of banking actually works pretty well. Even in the fading hangover from the global financial crisis, trillions of financial transactions are made every year with astounding speed and accuracy.

I recently retweeted my recent post “From Transactions to Relationships: Innovation’s Next Horizon”, where I argued that banks are in the relationship management business; and I received a great response from Yann Ranchere, Finance Director of Anthemis Group, and publisher of the Tekfin blog, which is on my regular reading list.

In response to my tweet, Ranchere asked why becoming a dumb pipe was such a bad outcome, and he sent me a link to a post he had written in 2011 “Banking as a platform – what retail banking can learn from investment banking”.

I replied that I didn’t disagree; I just didn’t think that a lot of banks were making that choice consciously.

Ranchere added that banks have infrastructure management in their DNA, (which is of course true), and I replied about the relative unattractiveness of utilities compared to consumer product/service companies, especially because the industry will only support so many utilities.

Ranchere is absolutely correct. Banks do have this in their DNA, and some will be very successful at this. Think about State Street or The Bancorp, or even tiny CBW Bank in Weir, Kansas, the bank behind Moven. The problem is that the necessity to drive down costs and gain economies of scale mean that there will be only a few winners with this strategy.

Product Innovation

I would argue that very few banks to date have taken a product innovation approach, and I doubt that more than a handful are truly capable of being true innovation leaders. At least not in the same vein as Mint, PayPal, Square, Moven and other poster children for financial innovation.

This is not to say that banks and other financial institutions shouldn’t innovate. I spend a significant part of my life advocating, encouraging, preaching and cajoling bank leaders to place a higher priority on innovation. It’s just that most cannot expect to create and commercialize the majority of new innovative products and services from within their own four walls. They absolutely should be innovating early and often, but with a much broader perspective that is more inclusive of outside partners.

To effectively innovate new products and solutions, banks need to partner with FinTech companies, and even with each other. There is massive duplication of efforts in the industry.

Bankers are inherently risk-avoidant. At best they’re risk managers. Bankers have to be right 99% of the time in lending decisions, but innovation is about taking risks and failing and learning from those risks until you get it right.

The key is to fail fast and fail cheaply, and fail in an environment that is firewalled from impacting customers or shareholders.

How Banks Can Compete in the Future

Customer Relationship Management

I believe that more banks can win with a Customer Relationship Management strategy, but only if they actually run the business that way.

Most bankers would probably argue that they have always been in the customer relationship management business, but if we’re honest about the activities that get the most energy and attention in the industry, it really seems that most have taken an Infrastructure Management approach (I know, I know… the regulations rather reinforce that…).

Look at some of the descriptors of the Infrastructure Management strategy:

Battle for scale… Check.
A few big players dominate… Check.
Cost focused… Check.
Stresses standardization, predictability and efficiency…Check.

A Customer Relationship Management approach is about economies of scope— expanding the share of wallet, in industry terms. Sure, we pay lip service to that, but it’s the customer-comes-first mentality where we usually drop the ball.

And that’s where the industry is most vulnerable to nimble start-ups that design everything around the customer experience.

Can FinTech Improve Investor Behavior?

October 21, 2013 by JP Nicols

In my last post Personalized Service in the Digital World, I discussed the so-called “Robo-advisors”—the new breed of technology-driven online investment advisors—and how they are changing the competitive landscape, whether or not traditional advisors like it or even realize it.

I recently attended Money2020 in Las Vegas to hear directly from some of the “Robo-advisors” themselves. Most of the conference was focused on new technologies in payments and e-commerce, but one session “Emerging Wealth Management Solutions” featured Personal Capital CEO Bill Harris, SigFig CEO Mike Sha, LearnVest CEO Alexa von Tobel and Asset Vantage CEO Sunil Dalal.

One of the most surprising things from the session was that Harris, Sha and von Tobel all felt strongly that by 2020 the majority of wealth management will still involve real live wealth managers. Harris agreed to that statement as a ‘5’ on a scale of 1 to 5, and von Tobel ranked it as a ‘6’. SigFig’s Sha answered ‘5’ for high net worth investors, but ‘2’ for the mass market (meaning lower advisor involvement in the future).

Also notable was the fact that despite all of the firms’ heavy investment in technology, that was not what the panelists focused on in their discussion. At least not in the context of better trading algorithms or more sophisticated asset allocation models. Instead, they focused on how they deploy technology to reduce investor expenses and overcome the common failures of human behavior.

In other words, some of the same things that any good advisor should be focused on in their own practice.

Weight Watchers for the Financial Space

LearnVest’s von Tobel said that “Money is 10% math, 90% emotion”, and described her firm as “Weight Watchers for the finance space”. I like that analogy because the basic formula to lose weight is deceptively simple—eat less and move more.

Yet, people spend billions a year on gym memberships, workout gear and diet books. And yes, on trading advice, financial plans and investment seminars, too. All of the gadgets and bells and whistles are alluring, but the basic formula for growing wealth is simple too—spend less and save more.

Setting aside Asset Vantage’s Dalal, whose firm has a different hardware and subscription driven model (and who was less optimistic about the future role of advisors), the rest of these disruptive asset managers are all RIAs. They are in the exact same business as many readers of this site. They just have a dramatically different service delivery model, and they have collectively raised over $100 million in capital that is betting that their model wins over the long run.

I believe they will win if they can convince people to actually change their behaviors. They have the advantage of leveraging their technology to give regular feedback at a scale not possible for most individual advisers. The Nike Fuel Band and competitors like fitbit have helped thousands of people tune into their caloric intake and level of activity needed to burn off the excess. Maybe the next generation of financial advisors will be able to help investors avoid costly mistakes in their financial behavior too.

As Personal Capital’s Bill Harris put it,

“The biggest problem is inertia, and technology alone won’t help that.”

(A version of this post first appeared in my blog on InvestmentNews.com)

Personalized Service in the Digital World

October 16, 2013 by JP Nicols

Since my Sept. 18 post in the Investment News techconnect blog, “Financial technology trends advisers can’t afford to ignore”, I have been in a number of conversations about how a new crop of web-based investment management/financial planning services are affecting the industry.

Opinions have run the gamut from, “Advisers are toast, everything is moving online,” to “No way, X type of clients will always want personalized service.” As you can well imagine, the tenor of those comments were colored greatly by where the commenters are in the industry or what their business models look like.

Although investor sentiment varies somewhat during different economic cycles, somewhere around 25% to 30% of investors are do-it-yourselfers, and another 20% to 25% want regular help from advisers. The largest chunk is somewhere in between. They make some of their own decisions, but sometimes they want help.

The Consumerization of Technology

I suspect that those numbers increasingly will tip toward more self-service as the consumerization of technology continues to spread. Many of today’s consumers carry better technology around in their pockets than their advisers have on their desktop. Affluent consumers in particular are utilizing a wide variety of software-as-a-service with increasing regularity, and there have been lots of investing and financial planning offerings in the past five years.

This trend will be exacerbated as a $41 trillion bubble of wealth works its way down to Generations X and Y. Members of those younger generations have grown up with technology, they are comfortable with (and often prefer) online services, and many do not have relationships with traditional advisers.

Does that mean that the days of the one-on-one client/adviser relationship are coming to an end? I don’t think so, but I do think they are already changing.

As younger investors grow older (the oldest Gen Xers are already in their 40s) and take on more responsibilities in all areas of life, and as their financial lives become more complex, they may want more adviser help. But the form and method of that help will likely take shape in the form of more video conferencing, online collaboration and other forms of electronic communication.

Enter the “Robo-Advisers”

Raef Lee, managing director of the SEI Advisor Network, recently blogged about “5 Ways Robo-advisers Will Change the Way Advisors Work”, which he enumerated as increased peer pressure, a call for transparency, pressure to accommodate a younger generation, more technology and access to comparative data.

I think all of those are valid points, but what concerns me the most is that the pace of change exhibited by most advisers and firms is much slower than the pace of external change. A device known as the iPad reached 50 million users in just 18 months, and that’s just about the time it takes for a new idea to work its way into the budget approval process at many firms.

And of course, it’s not just about buying and deploying new technology. I often ask, “Remember when laptops revolutionized financial services?” Yeah, me neither. Today’s technological advancements definitely have the potential to make seismic changes, but advisers will have to adopt and utilize these new tools in ways that the clients actually value.

Merely providing “personalized service” is not really a differentiator today, and it will be less so in the future. Hordes of travel agents, book and music stores, and electronics retailers all bet that their customers would value their personalized service over online solutions, but only well-focused niche specialists have survived in the face of these sea changes.

(This article originally ran in my regular blog on InvestmentNews.com. Subscribe for free and keep up with all of my latest content there.)

From Transactions to Relationships: Innovation’s Next Horizon

October 1, 2013 by JP Nicols

There has never been a better time for innovation in financial services, yet most financial institutions struggle to build lasting, profitable relationships with their customer base. New ideas abound, yet actually implementing those new ideas, let alone realizing their financial promise remains elusive.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

– Charles Dickens, A Tale of Two Cities

Why?

One of the reasons is that so many of our industry’s innovations have been about improving transactions, not relationships.

We can access our accounts 24 hours a day, 7 days a week. We can move money from point A to point B with speed and precision. We can access tax, investment and financial planning advice from software and online experts.

So what?

Sometimes we still can’t find what we’re looking for. Sometimes we don’t want to do it all ourselves. Sometimes we want a little help. Sometimes we want to just talk to a professional who will actually listen.

Customers today have many choices, and merely offering the usual menu of products and services will not create a compelling reason for them to choose your financial institution from the sea of similar offerings.

It’s not about your branch, or your ATM network or even your mobile banking platform. Those are just “dumb pipes”.

From Transactions to Relationships

But what if we spent just a little of our innovative energy on improving the relationships customers have with their financial providers?

What do we need to do to move from transactions to relationships? There are four imperatives:

We have to shift our mindset from execution to diagnosis. In healthcare terms, it’s shifting from handing out prescriptions and treating symptoms to really understanding the underlying causes.
We have to consciously build trust and loyalty with our customers. We have to think beyond the transaction, or even a successful series of transactions, and take the necessary steps to have our clients perceive– and believe— that we are worthy of their trust and loyalty.
We have to move from product development– you know, that process where you launch a product that your team has been asking for, then point fingers internally when the financial results fail to meet expectations– to customer development. Customer development is an approach that makes sure that you are solving a problem or meeting a need that your paying customers actually care about.
We have to engage the ecosystem. No product or service exists in a vacuum. Before we launch anything, we need to make sure that we are solving a problem our customers want solved, we have to understand the role our internal and external partners play in the process and we have to know what the value chain looks like and where we fit in. We also want to make sure we avoid any co-innovation risk and adoption risk along the way.

It’s not rocket science, but it is a big change from the way most financial institutions do business. If we can do those things well, we can begin to create value in our relationships and we can innovate new paths to profitable growth.

Bank Innovators Council Launch Party

September 15, 2013 by JP Nicols

Last week during Finovate Fall 2013 we launched the Bank Innovators Council. More than 75 bank innovators, entrepreneurs, CEOs, bloggers and industry analysts joined us on a Manhattan rooftop to celebrate the launch of the first organization designed by bank innovators for bank innovators.

We are proud to be creating a platform to bank innovators do together what they can’t do alone. Join us at BankInnovatorsCouncil.org

Finovate Fall 2013 Best of Show Winners

September 12, 2013 by JP Nicols

Finovate Fall 2013 wrapped up a whirlwind two days of FinTech innovation in New York on September 10 and 11. Eight of the 69 presenting companies were voted Best of Show by those in attendance.

Five of those eight winners had direct or indirect applicability for the investing/financial planning/wealth management space (LearnVest, MoneyDesktop, Motif, TipRanks and Yodlee).

Rising Above a Difficult Venue

This year’s venue at the Manhattan Center (which includes the historic Hammerstein Ballroom) was not the best for this kind of show. Finovate is really two simultaneous events– the eight sets of back to back to back rapid-fire 7-mintue demos (no slides or Q&A), and the longer one-on-one interactions with the presenters at each of their booths for those who want to learn more and/or make connections. Past venues provided sufficient separation between the stage and the presenter booths to allow both to co-exist. That was not the case this year, and unfortunately both parts suffered a little.

Beyond rows of chairs close to the stage, better seats with tables were placed around the two balconies, with remote viewing via video screens also available on the 7th floor and its balcony (plus a press room in the basement) . This split up the crowd a quite a bit and did make it more difficult for the ongoing conversations and networking that are so valuable at a show like this. There were also a few audio glitches that detracted, but the WiFi was much better than last year at Javits Center.

Still, it was great to see all of the newest innovations, meet the innovators behind them and catch up with my growing list of friends at these must-attend events.

Bank Innovators Council

(In a semi-related note, we held the launch party for the new Bank Innovators Council on the middle night of Finovate. More than 75 bankers, partners and thought leaders joined us on a Manhattan rooftop to kick off this new organization designed specifically to help bankers innovate together in ways they cannot do alone. More on this in a future post)

Finovate Fall 2013 Best of Show Winners

(in alphabetical order):

Interactions, for its voice-based virtual assistant technology

______________________________________________________

LearnVest, for its iPad app and Workplace Solutions Center

______________________________________________________

mBank & Accenture, for their Bank 3.0 online platform

______________________________________________________

Mitek for its Mobile Photo Account Opening solution

______________________________________________________

MoneyDesktop, for its GuideMe solution

______________________________________________________

Motif for its platform that lets you invest in ideas in one click

______________________________________________________

TipRanks, cloud-based accountability engine for investors

______________________________________________________

Yodlee, for its debut of TANDEM that helps groups manage and discuss shared finances

Congratulations to all of the Finovate Fall 2013 Best of Show winners, all of whom are very deserving of this honor.

I also send an extra personal congratulations to my friends at MoneyDesktop and Yodlee, whom I have had the pleasure of getting to know and work with over the past year. I look forward to our future collaboration.

Read the entire story on finovate.com, where you will also soon be able to see videos of all 69 presentations from Finovate Fall 2013.

Bankers of the World, Unite! (and Innovate!)

August 22, 2013 by JP Nicols

Innovating in banks is hard.

It’s even harder doing it alone.

FinTech entrepreneurs have incubators, accelerators, VCs and hackathons to support and encourage innovation, but banks are on their own.

Until now.

Today I am excited to introduce the launch of the Bank Innovators Council, along with my co-founder, former BBVA Compass executive and fellow innovator Will Trout.

We know that most banks are not able to afford their own innovation labs and teams.

But we also know they can’t afford not to innovate.

The Bank Innovators Council is primarily designed for financial institutions without fully developed innovation capabilities. The council will provide opportunities for members to pool their resources to develop and test new ideas outside of the day-to-day demands of their existing businesses, in ways they could not do alone. We will also curate outside research and technology and help bank innovators create, test and launch new ideas.

Read today’s full press release.

Launch Party in New York during Finovate Fall

We are hosting a launch party for the Bank Innovators Council on September 10, 2013 in New York, coinciding with the Finovate Conference September 10-11, where 60 FinTech companies will demo their latest technology to an expected crowd of 1,000 bankers, investors, analysts and members of the media.

Limited spots remain for the launch event, and requests to attend can be made here.