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Broker/Dealers: Robo-Advisors Are Just The Tip Of The Iceberg

A few days ago, I asked a friend (and a fellow Financial Services professional), what he thought of my webinar title: 3 Reasons why IBDs need a FinTech Strategy to survive Industry disruption. He liked it. But followed up, “Do you mean ‘Robo-advisor strategy’? ‘FinTech’ is too broad.”

I agree. ‘FinTech’ – like ’Financial Services’ – is too broad. People who are familiar with our industry are quick to ask about my sector when I say I work in the Financial Services industry. Financial Services is quite broad and specifics matter. But I stuck to my webinar title, because I meant it. Broker/Dealers need a ‘FinTech’ strategy not just a ‘robo-advisor’ strategy.

Why? I can think of at least three related reasons. But first, the definitions.

I have seen many similar definitions of ‘FinTech.’ For me, ‘FinTech’ refers to the use of technology by a financial services institution as its business (revenue) driver. ‘FinTech strategy’ refers to a deliberate decision by the financial services institution on how it wants to use technology, especially software, as a business revenue driver to compete effectively in the market place, along with the identification of a sound approach to get to that desired capability state.

Now, back to why a ‘FinTech’ strategy and not just a ‘robo-advisor’ strategy. Let’s start peeling away the layers.

Your Current Business model

Insurance-owned and bank-owned Broker/Dealers still account for more than 20% of the total US advisor force. For these and other Broker/Dealer firms who have sister ‘producer’ firms distribution of their proprietary insurance, annuity, mutual fund or ETF product/s is a significant part of their business model. If you are one of these Broker/Dealers, then several FinTech areas should be on your RADAR due to disruption impacting those sectors – and their subsequent impact on your integrated business model that depends on this distribution channel.

Let’s say your Broker/Dealer organization is not bound in any way to distribute proprietary products. Even then, you cannot ignore FinTech disruption beyond automated investment advice AKA robo-advisors. If your platform is enabling advisors to distribute products for holistic financial plan – say insurance for protection planning, trust services for estate planning, credit cards for liquidity planning – or if you provide some bill pay or banking support for convenience – you should definitely be thinking about how your advisors’ role will evolve in the coming days.

When disruptors set up insurance marketplaces bypassing intermediaries or when consumers expect ewallet payment options bypassing banks, you will need a ‘FinTech strategy’ that thinks beyond robo-advisors to address these changing expectations.

Let’s go a level deeper.

Sector lines will morph as disruption continues

A recent report by World Economic Forum identified and analyzed implications of FinTech innovation trends on incumbent institutions and the overall financial services ecosystem. The report identified three disruption themes specifically impacting Investment Management sector, which could also morph this sector’s boundaries: Automation of high value activities, Customer Empowerment, (emergence of) Niche specialized products.

For example: when margin pressures increase due to more automated advisory entrants, ‘robo-advisors’ may gain complete for customer’s traditional savings deposits. In that case ‘Investment/ Wealth management’ sector will intersect more with ‘Deposits and Lending’ sector.

In another instance, as Internet-of-Things (IoT) gains traction and insurance providers collect more consumer data, their value in a full service financial institution is expected to grow. In this case, ‘Insurance’ sector will overlap more with the ‘Investment management’ sector for investors’ ‘protection’ needs.

While the robo-advisor threat is today’s reality, to survive in the long-run, a Broker/Dealer needs a FinTech strategy that keeps it relevant when sector lines blur.

Robo-advisors and morphing sector boundaries are just the tip of the iceberg; a symptom rather than the root cause.

Let’s get to the heart of the matter.

Financial Services industry is being restructured with digital disruption.

If you feel that the digital transformation of your Broker/Dealer organization is close to being complete because you have enabled investors’ access to investment accounts via a mobile app or enabled online application submission, or are fanatically monitoring your website traffic, you are mistaken.

Chris Skinner, chairperson of FS Club, put it best: “FinTech (disruptors) are designed for the digital distribution of data in a globalized network; Financial Institutions of the 20Th Century are designed for the physical distribution of paper in a localized network.” In today’s world where mobile penetration (51%) is higher than internet penetration (43%), the mobile digital network is poised to ‘redefine money’ and enable frictionless exchange of value in real time due to ‘mobile financial inclusion.’ To stay relevant, Broker/Dealers need FinTech strategy that will leap frog them into operating efficiently in this restructured financial system.

Social data, IoT device data, Mobile data, data from a person’s digital footprint, Environmental data – all these will deliver loads and loads of data in near future. When a simple mobile app can provide real time information on traffic delays and alternate routes based on your current location, do you think an investor will be content getting investment advice based on information they self submit to the advisor once a year? Investors will expect their advisor to provide real time, relevant, and personalized insight based on several sources of data directly accessible by the advisor.

As the disruption continues, leaders in the wealth management space will emerge by finding ways to fulfill one or more aspects of the value chain:

  1. capture/procure, consolidate and use data effectively
  2. enable real time, relevant, personalized, and responsible advice in a economically viable direct or intermediary channel
  3. provide a transparent market place with a wide array of competitive financial products
  4. enable seamless investor action

Today, robo-advisors are starting to fulfill some of these needs but they are still in their infancy and just scratching the surface. Tomorrow other players may emerge.

Given Google’s capability to capture data and provide relevant insights, Broker/Dealers may be competing against Google or someone similar in the coming years.

Your nemesis is not robo-advisors but yourself, if you are unable or unwilling to adapt to the new redefined financial system. Develop a FinTech strategy that looks beyond robo-advisors to keep you relevant.

1. “The future of money, trade and finance” – Chris Skinner at USI Events 2015
2. “The Future of Financial Services” – World Economic Forum
3.”Creating an Authentic Experience in the Peer-to-Peer Economy” – R “Ray” Wang

(Click here for slides from the webinar ‘3 Reasons why IBDs need a FinTech Strategy to survive industry disruption’. Click here for the webinar recording.)

Author is the founder and CEO of S2E Consulting. Request a free consultation to explore how S2E Consulting can help your Broker/Dealer firm stay relevant during this industry disruption.


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