Is the Private Bank the better Robo Advisor?
We hear repeatedly that the era of the Private Bank is coming to an end, as digital and lately AI solutions take over Financial Planning and Investment Advice. Robo Advisors are believed to be the up-and-coming business model without human interaction needed. And asset growth figures seem to confirm the picture. True Wealth, one of the leading Robo Advisors in Switzerland, for example reported a growth of almost 46% in September 24 – leading to over 1.5bn CHF in Assets and allegedly the lowest fees in the Swiss Market.
This business model works fine, as long, as the client needs a simple investment portfolio or pillar 3 solution and is looking for a liquid long-term portfolio. For clients with no special needs and the desire for a liquid, transparent portfolio solution with a long-term horizon and focus on cost, that is a viable solution. But two questions remain open:
Addressing these two questions, if we look at the more traditional Private Banks, we see for many of them also very solid and constant growth rates and Asset Inflows in terms of AuM, if we look at the hard figures. Take for example HSBC with a Net New Money inflow of almost 6bn CHF or 9.2% of AuM. In my eyes, this is a clear sign, that as soon as financial requirements become more complex, for example because of a global footprint of the client or more complex earnings or family structures, the personal relationship and global footprint of Private Banks still add value. Of course, the value is no longer in giving a “simple” investment advice, for this Private Banks are more and more relying on digital and AI solutions as well but giving advice and offering solutions beyond a liquid investment portfolio, giving options and taking over the financial education of the client to make informed decisions.
The new technologies though do not only enable Robo Advisors to offer automated investment advice, they also help the traditional Private banks to improve their advice by counteracting biases. In addition, thanks to AI complex regulatory requirements that traditionally took up a lot of time from the client advisor can be addressed with more efficiency. Giving the advisors time they used to spend on regulatory requirements back and supporting them through the same technologies to cater for the more complex financial aspects will never come out of fashion.
Another aspect, that should not be neglected is the perceived and real security of traditional banks. Although regulation seems sometimes to be overdrawn, it as well as the long tradition and history of these banks give clients the security that their money is in good hands. This is also reflected in the fact, that after a certain financial threshold, usually around 1mCHF in liquid assets people prefer to have a regulated bank with a good credit rating and long-term history that radiates security and professionalism.
Profitability also remains a key challenge for these banks, as using the new technologies require large investment. At the same time, keeping traditional banking structures, which usually means that personnel cost add up to about 70% of the total cost base makes it difficult to compete in the price war of Robo Advisors. This makes it even more crucial to ensure that client advisors can add value and help solve the more complex financial questions acting as “Financial Project Managers”. If the client receives a perceived value-add, the willingness to pay for it raises with almost all clients. And for those, who remain cost-focused the simple and effective Robo-Advisor solutions will always be at hand.
The new Client Advisor – adapting to new realities
We all are aware of the long-predicted shift in assets to the next generation that slowly starts to accelerate and will peak within the next years. “Next generation” in this context is not as often missunderstood Gen Z but Gen X and Millenials. This group of the now 40-60 year old are growing their assets not only by inheritance but also through wealth accumulation. And they have different needs and access to the financial markets than the generations before them.
Thinking about the shift in client needs, the former straight forward HNWI client with a regional life focus, a simple lifestyle and no complex family structures who simply needs a solution that support the wealth preservation and accumulation over the years of earning for a decumulation at retirement age, is hardly the model of the future.
Today, we see interrupted CVs of active young professional working for example in London and Zurich with family roots in Munich or Paris, that need cross-country access and solutions regarding tax, retirement and financial planning. Regular sabbaticals that need to be financed as well as changing relationship structures need to be taken into consideration as well. So very easilty, we no longer have a long-term wealth accumulation focus but rather several different time horizons and scenarios that may change regularily.
Combine this development with the rapidely changing technology that enables investors to make self-directed investment decision on their portfolio and the key questions that pops up immediately is: what is the future role of the Client Advisor and is he/she still needed?
Client advisors are not obsolete, but have to reinvent themselves
The increasing complexity of clients’ lives and financial situations, as well as the underlying values discussed above, should be at the center of the client-advisor relationship. Simple investment advice is no longer necessary as clients have access to information and digital solutions and can do this themselves.
The future value-add of a personal financial advisor is to foster a comprehensive wealth-impact approach. Using modern technology to avoid behavioral biases and noise in investment decisions and helping the client navigate the complexity of their financial situation given more diverse CVs and life concepts will help to increase the client engagement and see the adivsor less as a “sales” person and more as a “financial project manager” who helps to navigate the complex financial environment.
This shift in the understanding and role of a former “Relationship Manager” requires changes in processes and tools. Advisors need to be able to spent more time with their clients (recent studies show that they are only spending about 30% of their time with client facing activities) and technology needs to be used to avoid noise and behavioral biases. Asking the right questions and interacting on eye level requires the rigth skills as well as the right advisor- client match. Thus the coverage model as well as processesa and tools need to be revisited to make the Front Office fit for the future.