Banks to follow Capital One's foray into digital advice
Banks are lining up behind Capital One to launch robo platforms even as they gird for an initial hit to their brokerage business, say industry analysts.
Banks need the platforms to expand relationships with customers and keep them from going to rivals offering the automated services they seek.
"Most of the large banks are working on them," says Peter Bielan, a principal of research firm Kehrer Bielan Research & Consulting.
Bank of America, for example, plans to unveil a robo platform this year and several other banking titans have either announced plans—or hinted at plans—to do so.
Small and medium-size banks will also be getting in on the act, according to Bielan and other analysts. Community banks and credit unions are expected to add robo offerings through their third-party broker dealers, which are putting together platforms for their financial institutions. LPL, for instance, announced that it is planning to launch a digital platform this summer.
Some market observers described the trend as a certainty for banks. "It's inevitable. Within three to five years, you're going to see just about every bank have some version of their own robo offering," says Scott Stathis, managing partner of research and consulting firm Stathis Partners.
Banks need to provide a low-cost option to customers given the growing popularity of digital advice. "If a client is in a low-cost product somewhere else, this may be an alternative for them to bring the business in-house," says Bielan.
The Labor Department's new fiduciary rule has also heightened banks' interest in launching digital advice platforms, motivating them to act faster than they otherwise would have. "Banks are going to need a place for smaller-dollar clients," Bielan says.
In the past, advisers were able to work with less affluent clients by charging one-time commissions for the products and services they provided, but since the new rule severely limits their ability to charge commissions, it "may not be as financially viable for advisers to personally work with clients with lesser dollars to invest," Bielan says. Digital advice platforms, he explains, "provides a channel for those clients to still receive investment advice."
Short-term negative impact?
As much as banks are pushing to offer robo technology, they are bracing for the potential negative impact to their brokerage businesses. "It's a negative to the bottom line at least in the short run in most cases," says Bielan. "It's harder to make money on that segment of the business right now. "
Capital One's "Advisor Connect" robo offering is available to clients with $25,000 to invest. It charges a .9% annual advisory fee, which includes access to advisers, many of whom are certified financial planners.
Capital One's offering follows BBVA Compass, which introduced its digital platform in January, and RBC, which introduced a digital advice pilot in February. Both BBVA and RBC white-labeled BlackRock's FutureAdvisor robo platform.
Technology built in-house
Unlike BBVA and RBC, Capital One took the unusual step of building its own platform in-house, a move that some observers question. "How can Capital One, which is a bank and not a software company, develop a robo offering that's anywhere near as close as the robo offerings that are out there that are being private labeled for banks?" Stathis asks.
Stathis predicts that Capital One will replace the platform with an established offering that's doing white labeling for other institutions. "Once they realize how much money they have to put into development just to keep up with other offerings, they're going to abandon it," says Stathis.
The bank is rolling out a new digital advice offering that pairs robo technology with financial advisers, most of whom have the CFP designation.June 17
Not everyone was skeptical. William Boland, a senior analyst in the wealth management unit at Aite Group, noted that having an in-house platform could give them a level of flexibility and control over the client experience that they might not achieve with an outside provider. The only caveat, he says, is that Capital One be able to develop and maintain the platform without having to "bend over backward to provide the service functions."
Overall, analysts applauded Capital One's hybrid robo model, saying that blending technology with human advisers was the right approach. They also commended Capital One for being on the early edge of implementing the technology and leading the way for other banks.
"It's a good start to differentiate them," Boland says.
Some analysts, however, questioned the pricing, saying it was expensive, even for a robo with access to human advisers.
"It's on the high side," says Wayne Cutler, an executive vice president at analytic advisory services firm Novantas.
Cutler noted that at 90 basis points it was close to what live advisers charge for their services. "I expected the hybrid to be close to 60 – 65 basis points," he says.
Analysts agreed that the offering would evolve over time, with pricing options and new bells and whistles added down the road.
"It's not the final completed end result. They wanted to get out in the marketplace with the base product," says Bielan.