A Case for Robo-advisors

Technology is changing the day-to-day operations of banks and their employees. Many are hesitant and resistant to a technology takeover, but many of these digital services can revolutionize the banking industry, giving employees more opportunities to do work that generates more revenue and has more meaning.

Financial advising is important. However, many bank branches aren’t dealing with people looking to trade stocks or hedge positions in the stock market. This more frequently looks like people wanting to set aside a little bit of money long-term—retirement, college funds, saving to buy a house—people that just want a little guidance along the way.  

Robo-advisors “use computer algorithms to build and manage a client’s investment portfolio.”² These services allow the customer to choose things like time frames and investment risk and the computer does the rest of the work. This is a low-cost way for banks to manage investments. But this doesn’t translate as well to those who are seeking financial planning rather than just investment management, but with so many only wanting management services, there is still the option to do a combination of robo-advisors and financial advisors.

OceanFirst Financial CEO, Chris Maher, believes that approaching this from a very methodical manner allows a bank to reach more people, “I think by leveraging technology, we’re preserving the interaction with our customers, we do that typically over video, although some will be face-to-face, we’re using a risk and investment engine to reduce the operational cost of that product so we can get it out and we can cost-effectively deliver that product.” At their bank, they have developed a risk-appetite questionnaire that the client goes through with the advisor to determine what their asset allocation should be and then match that to one of their many asset-allocation models to match their risk appetite. This works well for those who don’t have as much to invest and don’t necessarily require a specialized plan while still offering one-on-one advising.

Maher says that one problem they’ve faced with traditional investment advisors, even those who work in bank branches, is that often times there’s more interest in building relationships with those who have more money to invest, “and that’s fine, we want to help those people, but we also want to make this product available and accessible to someone who may have 10k or 20k, and that may not seem like a giant amount of money to a money manager, but to that customer, that may be their life savings, their start in life, if they’re looking to buy a house, or put away towards retirement.”

This model takes the financial and mathematical portions out of an advisor’s job duties, and their roles focus on guiding and helping the customer—“explain how the risk models work, explain how our asset allocations work, how we pull together our EFTs, how to read their statement, how to understand how their account might react in different market scenarios.”

This system saves a lot of time for the customer and frees up more time for employees, with typical “getting started” conversations only taking 15-20 minutes. Maher also believes the expedience of the system is helping people make better investments, as well, noting that they’ve noticed many customers would typically come in and do a 2-year CD just to save time are now exploring other options for better investments.

The last perk Maher mentions of the incorporation of robo-advising is that, with traditional advising, “one-on-ones are not scalable, and we need to ensure advice is consistent.” This is increasingly more difficult the more branches a bank has and as a bank grows. This method allows consistency among a “wider range of environments and geographies.”

There may be a digital divide in the banking industry for a long while. To cater to the varying preferences of the generations banks are currently serving, utilizing technology to advance services and increase reach may be the right solution for your bank.

Sources:

1. Penny Crossman, host. Chris Maher, guest. “What will bank jobs look like in the future? OceanFirst has an idea.” American Banker. 16 Dec. 2019. Retrieved from Apple Podcasts.
2. https://www.nerdwallet.com/blog/investing/personal-financial-advisor-robo-advisor/