Robo Advisors: Embracing the Rise of the Machines

Computers have started to replace humans at the lower end of the financial advice market. Robo advisors – automated portfolio management services that use algorithms to dispense advice and manage investments – are becoming popular with consumers due to their low cost and ease of use.

Depending on where you sit on the financial provider spectrum, you may see this financial technology trend as a threat or an opportunity. But no matter how you respond, you can’t ignore it: Digital advice is here to stay. How you handle it will affect how current and future members view your credit union.

With trillions of dollars moving from the baby boomers to millennials in the near future, understanding and embracing a robo advisor strategy is especially important to firms looking for a competitive advantage and an additional offering to attract those assets.

The Options: Build, Buy or Ignore

Firms can respond in one of three ways: You can build your own robo advisor, acquire one or ignore it as a trend that doesn’t impact their member base. There are pros and cons to each approach.

You can invest in building an algorithm and bolstering your web presence to attract users. To be successful, you’ll need to hire skilled resources and budget plenty of time to develop an effective algorithm.

You could also acquire an organization that has already developed an algorithm. Buying an established player with an existing solution may increase speed to market, but factor in the cost and complexity of the acquisition to ensure you’re achieving adequate ROI. You’ll also want to find a firm that aligns with your business philosophy.

Finally, after assessing your member base and business goals, it may make sense not to invest in the technology at all. If your members aren’t likely to use it, and it won’t increase the efficiency or accuracy of your investments, it may not be worth pursuing.

The Hybrid Approach

You might also realize success by taking a hybrid approach. Moving to a hybrid model can help you blend a traditional advisor-driven model with technology that can reduce performance dispersion across your advisor base, meet members on your terms, decrease costs and scale your business.

Offering an algorithm-driven option to your members isn’t an all-or-nothing move. The further up the market a member goes, such as estate planning for individuals with high net worth, the more likely a member is getting advice from a person rather than a robo advisor. But your advisor base can still use the technology to inform their investment theses. That’s a way to embrace technology while continuing to provide personal service.

No matter what approach you take in the end, creating interest and driving traffic to those robo-based solutions is worthy of exploration.

As you prepare for the use of robo advisors, the following strategies can help ensure success.

• Assess the landscape. What robo advisors are currently in the marketplace? What are their value propositions in relation to each other, and to you? What is the potential threat to your business, and how soon might that threat be real? Are your competitors buying or building these capabilities?
• Develop an acquisition strategy. If your credit union contemplates buying a robo advisor, make sure to perform rigorous technical and operational due diligence of the organization. Assess whether the credit union’s algorithmic investment philosophy matches yours. Next, put together a post-acquisition integration roadmap to ensure a trouble-free transition that meets your goals.
• Transform the organization. As you move into a digital engagement model, evaluate the internal areas that will require investment, such as your website. You’ll need to build awareness of your new robo advisor, along with a way to drive traffic to it. Change management plans are critical to making the transformation a success.
• Align technology to business needs. If your credit union prefers to build proprietary web-based capabilities to complement the member-facing interaction model, you may want to enlist an unbiased outside party to help ensure you’re maximizing the technology to deliver on your business goals.

Robo advisors are on the rise, but they aren’t for everyone. Take a close look at your business and your member base to determine if, and when, robo advisors are right for your organization. Many organizations will find success in adopting a hybrid approach that leverages the technology internally, while maintaining the human touch of personal service.

Jim Kearney is a Principal for Point B. He can be reached at jkearney@pointb.com.