- Morgan Stanley has taken notable steps to expand its digital offerings in its wealth-management business. James Gorman, the firm’s CEO, thinks pure robo platforms only appeal to a certain segment of the industry. He also questions the cost savings associated with going robo.
Roboadvisers claim they’re going to dominate money management. Morgan Stanley CEO James Gorman isn’t convinced.
The financial giant has announced a number of new digital offerings including a goals-based roboadviser option for the children of existing wealthy clients and for Morgan Stanley stock-plan participants. But Morgan Stanley’s digital push is not an indicator that the firm’s leadership thinks human advisers will become irrelevant.
Gorman said people have predicted the death of the human adviser before, but it never played out.
“We actually saw this movie once before in 1999, when the direct plays came out, and the big fear was cannibalization,” Gorman said.”That would only have held true if people actually didn’t value the financial advisors and advice that we’re getting from those advisors, and it didn’t play out that way.”
Instead, Gorman said roboadvisers only appeal to a certain segment, robo-clients may move over to traditional players as they get older, and that traditional financial advisers are competitive on cost with roboadvisers when one considers all of the services they offer.
The wealth-management industry is made up of different “segments,” according to Gorman. There are some folks who are well-served by digital advice, and others who are better served by human help. An individual who starts out with roboadvice might decide they want a traditional financial adviser as they grow older and wealthier.
“The reality is the marketplace has different segments based upon consumer preference, and I think the digital strategy makes all the sense in the world, but it’s clearly a segment,” Gorman said. “Whether they change their behavior as they become wealthy remains to be seen, but there’s clearly a segment that wants to deal digitally just to serve as segment that wanted to deal through direct brokerage trading and so on.”
To be sure, it stands to reason that the CEO of a firm with 15,777 advisers on the payroll would defend their value.
Still, when you stack up everything that a human adviser provides, according to Gorman, they’re actually not that much more expensive for the client than a robo-platform. Here’s Gorman:
If you look at the average basis points paid from the various robo-platforms, they range, in general, I think, from something like 20 to 40 basis points. If you look at the average basis points for full-service advisory, like ours, just divide our revenue into our assets, including everything, you get somewhere in the 70s, low-70 basis points.
The affordability of roboadvice platforms such as Betterment and Wealthfront is one reason investors have poured billions into their funds. Still, the two firms, which both manage less than $10 billion, are dwarfed by Morgan Stanley’s giant wealth-management unit, which oversees $2.239 trillion.
Gorman said when you consider all of the services Morgan Stanley provides, such as the human advice, different investment products, research, and access to the hot equity deals, the price difference makes sense.
“It’s not clear to me that that is such an expensive gap,” he said.
A recent survey conducted by LinkedIn, the social networking site, shows that many financial professionals share Gorman’s view. According to the survey, 43% of those surveyed from the wealth-management space think fintech is overhyped.
“Financial advisors/wealth managers lead the charge on thinking that there will always be demand for traditional financial services, whereas interest in fintech will rise and fall (43%, compared to 29% overall),” the report said.
A big note on financial technology by Morgan Stanley, penned by a team of analysts led by Giulia Aurora Miotti, supports this notion that humans are safe in wealth-management.
“The financial sector consumer often needs some sort of human contact, especially when abrupt market moves lead to unexpected losses,” the analysts wrote.
As such, they expect firms that deploy a hybrid model of financial advice will be the best positioned for success in the wealth-management space moving forward.
The so-called cyborg or hybrid model refers to a financial advice platform that pairs algorithm based financial planning with components of human interaction. It’s essentially financial advice with a human face and robo insides.
Betterment, a firm many consider the poster child of roboadvice, provides a recent case study of the industry-wide shift towards hybrid financial advice. Earlier this year, the firm responded to the desire for human help by rolling out new hybrid services that pair human help with its computerized financial advice.