Financial service firms may want to think carefully before adding digital advice offerings to their suite, according to a report by Financial Advisor IQ.
Citing a report by Cerulli Associates, the article said that most executives at managed account firms prefer the discounted prices on their robo offerings, with 48% estimating that the fair price of digital advice should be between 25 and 50 basis points, or one half to one fourth of the cost of traditional advice.
However, Cerulli cautions against pricing robo advice too low, as doing so could make it difficult or impossible for firms to entice clients to switch to their more expensive traditional services even after their assets and financial needs grow. Clients may get used to the low fees and become reluctant to let go, even with the possibility of greater returns from more traditional financial products.
Traditional advice firms that hope to funnel clients from their robo platforms to their more traditional offerings may do well to charge more than the 25 to 35 basis points charged by robo-only firms. They will also have to do better at communicating the added value clients could expect from a human advisor, whose services would cost more than those provided by the firm’s digital advice platform.
About half of advice firm executives would prefer to incorporate robo advice into their overall offerings, while a third would rather set up a separate service. This reflects the division among large brokerages: Cerulli has reported that while Schwab offers a separate digital advice service, Vanguard offers its robo platform as part of its overall advice business.
Advice firm executives also disagree on the way by which a robo would be added to existing services. While 20% plan to build their platforms from the ground up, 12% want to outsource the technology completely, and another 12% think outsourcing just the development and investment strategy aspects is the best way to go. The most popular approach is to outsource the development but use their own firms’ investment methodology.
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