We all probably agree that the landscape of wealth management is globally being shaped radically by many interconnected trends. The wealth management industry has faced various mutually intertwined pressures that have been growing over the past decade, with global macroeconomic tailwinds, rapidly changing the technology landscape, significant monetary policies, evermore demanding customers, and the avalanche of regulatory and compliance requirements. It has become ever-more increasingly challenging to create shared value. While these make it hard for new entrants to enter the market, various technological advancements are breaking barriers to market entry and enabling new things to emerge. The rise and evolution of the robo-advisors and other forms of digital wealth management is one of the most exciting trends that is being currently discussed and deservedly so. These things are forcing incumbents to rediscover their who’s and why’s – who are our customers and what do we offer to them.
In September 1975, the U.S.-based Charles Schwab Corporation established the world’s first discount brokerage business, and in 1996, Schwab was one of the first most well-known brokers to offer online trading . On May 1, 1975, SEC mandated the deregulation of the brokerage industry, and thus brokerages were allowed to charge varying commission rates that were determined by market forces. Charles R. Schwab, founder and longtime CEO of the company, closely followed the events and decided to slash their fees significantly to introduce a new disruptive business model. In retrospect, Schwab was able to make a right judgment by offering an affordable alternative to the masses while other renown Wall Street firms, such as Merrill Lynch, decided to raise their fees thanks to the deregulation of the industry. By 1985, Charles Schwab Corporation had expanded from one branch to nearly a hundred offices, focused heavily on automation and by year-end, and had over one million clients with client assets of $7,6 billion. The story and success of Charles Schwab predate the rise of the Internet and subsequent digital age, so something they did was right on the spot. 
Robo-advisors, social investing platforms and other emerging forms of digital personal financial management and investments providers alike are alike first online discount brokers back the day. Current wealth management players are facing very similar issues as did the first discount brokers when the incumbents tried to attack them and block their business fiercely – just as those arrogant bankers who argued in the 1990’s that commissions cannot go any lower than 100 bps or that people will stick with their traditional servicing channels.
It is true, as Digia’s Petri Oinonen has argued in an old blog post, that the new regulatory requirements can also spark innovation and push forward automation.  Something that is not discussed is that any forms of non-market intervention have trade-offs which create opportunity costs, and there is no objective way to determine if these regulations actually work as intended (or what is the real purpose of the rules) as we tend to put aside unintended consequences that are not foreseen by the regulators. The transition from MiFID I regime to MiFID II regime is a massive change for the entire financial industry since MiFID II is so detailed and involves so many regulatory features that it is tough to make sense of it all.
If you have previously read numerous recitals of MiFID II, you have probably noticed how often investor protection is being emphasized everywhere (financial advisers are unsure about the regulatory impact on their business), and suitability standards are quite detailed. Better customer profiling, risk analytics, and new requirements for documentation are welcomed by many, but at the same time, things seem to get more complicated day by day. Brokers, wealth managers, and other capital markets parties want to be compliant but don’t care to allocate extra time or resources to focus on more advanced solutions for themselves and especially for their customers.
“To prevent something from happening in the world of fast trading is almost impossible. Your judgement will be based on something in the past. I don’t expect it will make anything safer because we already do all we can.”
– Senior European Exchange Figure, MiFID II’s algo plans come under fire
MiFID II will also affect robo-advisors as they have to, for example, fulfill, for example, strict suitability standards (not to mention all the other compliance and operations requirements standalone and enterprise robo-advisors are facing). There is an inherent paradox in this as the industry is getting more and more regulated, investors still need advice in managing their investments. I think that robo-advisors have a kind of an edge in this situations as automated portfolio construction and management fulfill suitability requirements (i.e., portfolio personalization), fewer humans are needed to keep all the documentation and profiling in check.
Before the emergence of discount brokerage, online trading, and robo-advisory, investment and wealth management was limited only to the rich and the wealthy. After each evolutionary step, the service offering has expanded and improved. Only those who could afford to pay hefty commissions and meet particular investment thresholds were qualified. However, today, thanks to new options available, that story is changing thanks to a wide array of choices available.
Thanks to robo-advisors almost all of those who could not afford wealth management before can now tap into at least some form of wealth management, and what’s even more important is that these new services are already offered with a reasonable price tag. It sounds like there is a better way to get analytical and independent portfolio management services, and it seems that financial advisors are interested in taking advantage of these new opportunities by adding some human touch. Charles Schwab has implemented a form of hybrid advice already as has Vanguard too.  These are examples of how the wealth and asset management business is being commoditized, but it should be duly noted that this is not solely caused by the rise of robo-advisors as such.  It is tough to commoditize financial planning services as it tends to be highly personalized and uniquely crafted to suit the personal situation of a particular individual in question.
The number of independent, standalone entrepreneurial robo-advisors and wealth management companies employing robo-advisory services is increasing at a fast pace as many of these enterprises have taken notice that there might be a significant untapped unmanaged wealth management market out there. Even though many people (me included) say that the time has come for the wealth management industry to be changed once again, does that mean this will happen now? There are good reasons to say that anecdotal evidence does not prove the case. Not all robo-advisors are created equal, and there are indeed some of them that will go from pet project to multimillion-dollar business in just a few short years. Robo-advisors have already faced considerable challenges, and it might happen that B2C robo-advisors will become extinct sooner than expected. One thing to keep in mind is that the robo-advisory is an emerging field of wealth management, and therefore nobody should expect it to stay the same for the time being. There will be those companies that come out of nowhere and will be huge, successful, but there will also be those incumbent robo-advisors that just don’t get it right. Robo-advisors must find a way to break through multiple challenges before they could become more widely accepted and have a considerable industry-wide effect. For me, it seems like most of the standalone entrepreneurial robo-advisors out there are set up to attract someone to buy them from the market. This, of course, requires that they can demonstrate somehow that they have a sensical value proposition combined with a scalable business model and channels to acquire more clients and serve the existing ones. Big online retail brokers are creating their robo-advisory solutions and at the same time looking for new players as critical partners or key resource providers.
We can already see that the first generation robo-advisors are losing their momentum, but that does not mean that the next generations will face a similar faith. Pure vanilla standalone advisors with simple portfolio management and investment universe limited purely to ETFs will not probably last for very long if they are not able to come up with something more sophisticated offerings to complement the core investment service. As already mentioned, big U.S. incumbents who have been experimenting with some form of plain vanilla robo-advisors are already moving forward, e.g., providing financial advisory services with the help of the hybrid consultative model, a broader range of financial vehicles (account types) and broadening their product line. Italian online bank CheBanca!, part of Italian investment bank Mediobanca, is already offering a relatively advanced form of robo-advisory combined with educational content and learning journey for their clients. Yellow Advice Chebanka! is first of its kind in Europe, and they have successfully integrated hybrid advisory as part of their branch network with the help of multiple strategic partners. There are numerous examples to discuss in relation to different scenarios but it’s essential to keep in mind that traditional financial advisors are not going to be replaced with advisors, but instead they serve as a form of embodied cognition, i.e., robo-advisors are moving on, and we can already see solutions emerging where they are integrated as part of the toolbox that financial advisors use in the course of their daily choirs. Advisors and Wealth managers are not stupid, and there are numerous ways they can outcompete their data- and tech-intensive rivals just by thinking things through and embracing the significant changes in the advisory value chain.
Paul Resnik has argued that our attitudes towards the financial advisory industry and financial services at a more general level are not given by accident. Technology is changing the landscape and creating even more fierce competition amongst the existing players. Wealth managers, stock traders, and financial advisors are not amongst the most respected professions in the world, and there is a reason for these negative perceptions.  Most of the people are relatively skeptical about the industry, people tend to equate stock trading with gambling and wealth management with shady business dealings (remember Mossack Fonseca and the Panama Papers?), mutual funds are closet indexing, financial advisory is about selling unnecessarily complicated financial products (some Finnish banks were fined a while ago as they failed to comply with the standards of investment advisory), and there is something deeply disturbing in the whole business of handing control over to someone else. Yes, yes… Not everyone thinks as some might think but no day passes by me not reading something about how the global financial system is entirely rigged against ordinary folks and how we are all being ripped off, therefore making people think that investing in real estate and other tangible assets is much more profitable than buying stocks independently or relying on semi-discretionary portfolio management. I do not know if the industry has fully recovered from the crisis of confidence and trust created by the global financial crisis. One does not to be tinfoil to understand these doubts and suspicions. Most of us are also quite concerned about robo-advisory, i.e., what happens if something goes wrong with the algorithms running under the hood or if I click a wrong box in some set of unrelated questions.
There has been so many scandals and crises over the years that it is hard to regain trust once it has been lost. Just think about massive Ponzi schemes, corporate accounting scandals (Enron), financial scandals (e.g., LIBOR rigging scandal comes to mind immediately), and the more recent cases of Wells Fargo’s fake accounts and the Panama Papers. It’s not just that we will not trust the people we are dealing with, but the overall confidence, whatever that means, we feel towards individual institutions is evaporating. I believe my bank and broker, but that is not to say that I trust them all the time.
In light of all these fears and suspicions, the financial services industry has not done very much to respond to concerns that at least some of the people have. It seems that the communication is a one-way street: something unpleasant happens, and then the top executives are summoned down from their ivory tower to explain that it is not our fault and that in the future everything will be different. This form communication is a reactive way as it is based on fear and humiliation; proactive communication is not in place, e.g., they do not justify you why this or that is done until someone tells about their bad experiences to the press or write a blog post about their disappointments. The industry as a whole has unfortunately failed to establish a genuine dialogue with their clients and reveal the inner workings of their business. This, once again, is not universally applicable but I think that at least some people feel like this.
The wealth management and financial advisory industry have not been able to address the issue of the sales-driven advice (“I call myself an investment advisor, but in reality I am selling our financial products.”), reasons for their overall pricing decisions (“Prices are what they are.”), the possibilities of sudden market pullbacks and new financial crisis (“It’s always a good time to invest – from here to eternity.”), regulatory issues (“We ask these KYC questions because we have to. You don’t need to know more.”), etc. In Finland, for example, it depends on whom you ask if people will trust their wealth managers or investment advisers. Some say that we are confident them, but then additional questions arise. What makes your investment adviser trustworthy? If you do not trust him, why are you in that relationship? Of course, robo-advisors face similar issues as they also need to establish and nurture trust-based relationships with their clients. Financial and robo-advisors both need to reinvent their story of why (purpose) and how in practice that they are reliable and trustworthy, as Paul Resnik argues.
Trust, as it has been defined in their 2001 book The Trusted Advisor by David Maister, Charles Green and Robert Galford, is built incrementally from straightforward service offering up to trust-based relationships. To be a trusted advisor, you have to master three core competencies simultaneously: you have to earn trust, continuously nurture relationships, and give advice effectively. The importance of confidence can never be exaggerated as every financial institution is always touting that their most precious asset is – surprise, surprise – trust. So what about if you acknowledged the facts and would not rely on that MiFID II would be enough, e.g., investor protection, pre/post-trade transparency and information and supervisory powers. Trust needs to be earned through consistent actions, not by implementing some sophisticated controls, doing some random paperwork, or creating new categories of suitable financial instruments. This work is something that your clients do not appreciate if the value of this covert work is not visualized to them and doesn’t tap new sources of value. Robo-advisors need to grasp these issues too although many of them already have digital client onboarding, documented and trackable investor risk profiling, algorithm-based portfolio management solutions, online visuals and dashboards, and performance reporting (massive opportunity for the more traditional service provider).
Robo-advisors, whether we are talking about the entrepreneurial standalone, hybrid model, entrepreneurial or some other form of robo-capabilities, come in many shape and sizes, but they have all faced a similarly massive amount of new regulatory and compliance requirements (ranging from AMLD4 and MiFID II to GDPR). As robo-advisors proclaim that they are here to offer convenience, independence, access, and transparency for the ordinary consumers, they need to provide us some sheds of tangible evidence that they are actually able to back up their claims, e.g. explain clearly and in simple terms how their portfolio management is set up, what kind of asset allocation models they use and whether there are conditions under which their algorithm-based investing might not work (certain caveats at least). For example, take a look at Hedgeable’s extensive FAQ and any of the research-based policy papers (or risk management approach).
Try to ask similar extensive clarifications from any of the most prominent Nordic wealth management firms or mutual fund companies. They are not even close to this level of details, visualizations, communication (in the past, Hedgeable had a great chatbot from which you could ask questions) and bringing up highly relevant content in an accessible way. There is so much to learn from these new players that I do not even know where to start. Just take a look at basic KIID or fact sheet information for any mutual fund or ETF – they are a total mess. 
I want to believe that at least some European financial service companies have already understood this, and some of the most forward-looking service provides managed to take furthermore customer-centric onboarding models, KYC procedures, and financial advice.
Do you think that building trust plays a part in the mass adoption of robo-advisory? What are the most significant issues that should be answered first, and how to mitigate negative perceptions people might have? Is it really about the superior product or is it’s actually about educating people, i.e., product-driven vs. service-oriented value proposition?
 There were primordial forms of online trading in existence before the 1990s and Charles Schwab. In terms of online trading diffusion, Charles Schwab was part of the early adopters and not the very first innovator although they had been looking into the online technologies already in the late 1980s, see “The Meteoric History of Online Stock Trading.”
 Nordnet, the most prominent Nordic online retail broker, was established in 1996, and it was one of the first Nordic online brokers alongside Swedish Aktiesparinvest, TeleTrade, and HQ.se. Avanza, a small online stockbroker, was acquired by HQ.se in 2001 and the name of the new company was Avanza Bank. A Finnish online broker eQ-Online, later known as eQ, was the first Finnish pure online broker. Nordnet acquired eQ in 2009 from Icelandic Straumur-Burdaras. For a more detailed history of eQ, see Janne Larma’s presentation.
 I have discussed hybrid advice model extensively in my previous posts. See What is Hybrid Advice, Really? (Part 4) Also, Robo-Advisors from the Hybrid Point of View (Part 3). The hybrid model has been explained in detail in a paper published by Accenture.
 Eric Boudier, Anders Porsborg-Smith & Martin Reeves: “The Art of Embracing Commoditization” (Boston Consulting Group); EY: “Global wealth and asset management industry outlook 2014”
 AOL. “Ten most hated professions in the UK“; Par D. Tencer “Métiers qui inspirent confiance: les PDG et les politiciens trainent au bas de la liste” (Le Huffington Post Québec); Aino Kangaspuro: “IL tutki: Näitä ammatteja ei arvosteta” (Iltalehti)
 They tend to be appalling and overly confusing with so much jargon that I almost fall asleep, but there are many good exceptions out there.
 Let’s be realistic about the complexities of contemporary securities operations management. Clearing and settlement, custody, reconciliations, managing transactions with numerous stakeholders, not to mention everything related to regulatory reporting and operational controls and procedures are not something that you just one day decide to automate. Many of these processes and their subprocesses have already been automated (e.g., STP in simple cash-only products), but there is still much work to be done (esp. global cross-border trading and custody & safekeeping services). This has to be a joint effort as it is tough for a single market player to request mutual fund companies to use SWIFT standard in messaging or ask their global custodian to receive instructions in standardized electronic form.
Every firm can, of course, carry out workflow analysis not just to understand the process as-is (with its strengths and weaknesses) but also envision new will-be state so that the process would be at least partly automatized and risks mitigated. I nonetheless think that tangible industry-wide benefits can be realized only via collaboration and coopetition.