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Robo advisors partner with smaller banks in challenge to brokers

Community banks and smaller regionals are turning to automated investment platforms to help cut ties with traditional broker-dealers — and the fees associated with commission-based products.

OceanFirst Financial in Toms River, New Jersey, is the latest bank to offer a hybrid robo advisor specifically designed for mass-affluent clientele. The $7.7 billion-asset bank announced a partnership with the digital investment advice provider Nest Egg. Customers will be able to access its advisory service through the bank's website and at kiosks installed in all the bank's branches.

Like many digital platforms, Nest Egg automates much of the investment process, including portfolio selection and risk analysis along with ongoing account management, rebalancing and contribution recommendations, according to the firm. With a minimum account size of $1,000, the platform targets clients with fewer investable assets than other independent robos do.

“What we’re doing is looking to replace the existing outsourced broker-dealer offerings," says Nest Egg founder and CEO Michael Church, who is also CEO of the Philadelphia registered investment advisor Addison Capital.

Nest Egg supplies co-branded software, a website and training for employees, Church says. “It was pretty clear we needed to create a better service model,” he says. “Historically, the smaller regional and community banks sold product, and our viewpoint is that annuities are sold not bought.”

Different robo advisor launches by banks in the past 2 years.

OceanFirst is also a minority stakeholder in Nest Egg and has worked with Addison Capital for its trust services, says Christopher Maher, CEO of OceanFirst. One of the bank’s executives also serves on NestEgg’s board of directors, according to the firm.

“Our demographic has really shifted away from traditional products like certificates of deposit for long-term investing goals,” Maher says, citing low interest rates and the popularity of ETFs.

With a majority of mass-affluent clientele, the traditional fee structures associated with brokerages were not making sense, Maher says. “The cost structure provides an overall lower cost to clients,” he says. “There’s a more traditional ongoing fee that is modest in nature as opposed to upfront commissions.”

Kurt Kunsch, CEO of Phoenixville Federal Bank, which first partnered with NestEgg last year, agrees that the old fee structures are not competitive. “Most of the broker-dealer models just weren’t working,” Kunsch says. “They were keeping more and more of the fee shares and trying to promote products and sales to keep their brokers alive.”

The Phoenixville, Pennsylvania-based bank generally kept around 15% of the overall fees with their previous brokerage before the move, Kunsch says. “Commissions just didn’t work well on the revenue side — or on the client side either. So, what am I really getting out of this relationship?”

On the other hand, the banks entered into a revenue-sharing agreement with NestEgg. Terms of the agreement were undisclosed.

Nest Egg isn’t the only platform seeking opportunities to merge investing and banking services. Fifth Third Bancorp's securities unit teamed up with Fidelity recently to offer automated advice, and for good reason.

The bank consulting firm Novantas reported 68% of bank customers are very interested or extremely interested in opening an automated investing account, and 45% would do so with their primary bank, according to a survey of over 1,000 respondents done with the advice technology firm SigFig. The top reason for doing so, respondents say, was for ease in transferring money between accounts.

With national firms leaning into the customer base of smaller banks, brand equity could become a major challenge.

“Realistically, when you’re competing with Charles Schwab, brand matters,” Maher says. “There are also thousands of community banks, and it’s very hard for anyone of us to establish ourselves. Developing a financial brand independent of your bank name is a real challenge.”

The two-year-old automated platform lists four employees, 23 clients and less than $100,000 in assets under management in Securities and Exchange Commission filings from May. Church declined to comment on assets under management, citing compliance concerns.

So, how profitable will a robo be that has a minimum account balance of only $1,000?

It’s all about gaining a customer base, Maher says. “Aggregation is a surprisingly powerful model,” he says. “It’s about using the technology to deliver service without requiring large balances.”

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