Is the fear of offering cheap advice dead?

AUSTIN, Texas — When digital-first advisors seeped into mainstream wealth management, industry executives raised concerns about the commoditization of advice.

Now, providers from Wealthfront to Goldman Sachs are packaging checking, savings and cash management account offerings in bids to offer the most attractive interest rates.

Some attendees at American Banker’s annual Digital Banking conference wondered whether conditioning customers to shop for the best interest rates — in addition to the lowest-cost options for advice — will only hasten wealth management’s commoditization.

Just like in the early days of automated advice, sustainability should be a real concern for many of these high interest rate account offerings, says Greg Bynum, president of Lead Bank, a Kansas City-based community bank.

“How do they make money on those high interest deposit accounts?” Bynum asked. “Some of these startups are offering up to 2.5% on $1,000 accounts. It costs more just to have an account like that in your system.”

In many of the cash account offerings, Bynum sees a repeat in strategy that digital advice firms adopted early on. “Some are doing it to get that mass of customers, and then figure out how to monetize them after.”

David Paul Morris/Bloomberg

Advice runs the risk of getting watered down, some noted.

“Wealth management is such a niche product, how do you keep it that way?” asked one executive from Cincinnati-based Fifth Third Bank who asked to remain anonymous in order to speak candidly.

Another real risk in blending wealth management with checking and savings offerings online is message muddling, noted the executive. “For sure, it benefits when you can add to the wealth management offer, but banks and wealth management [due to regulatory demands] have to keep a strict separation. As a customer, would I understand that?”

Digital advice firms, however, defend the latest addition of savings accounts to their service lineups.

“We see a high-yield account as table stakes at this point, especially as more and more [firms] begin to offer it,” said a Betterment spokeswoman via email. “It’s important to offer customers a solution for what to do with the extra cash that is sitting in their checking and savings account doing nothing, when it could be working harder for them.”

The leading independent robo advisor launched a tool to its more than 400,000 retail clients in December that can monitor a client’s linked checking account and steer excess funds into a low-risk ETF portfolio generating returns of about 2%, according to Betterment.

Americans are holding onto more cash. Retail investors maintained a record-high $3,673 on average in checking accounts across all financial institutions including banks, thrifts and credit unions, according to a 2018 report by Moebs Services, an economic-research firm. Checking account funds increased in 24 of the past 30 quarters, according to the report.

If clients are keeping assets in cash, then banks are putting them to use. According to a Wealthfront spokeswoman, the top four largest banking institutions make over $300 billion in revenue a year on checking and saving accounts — adding that the $8 trillion held by commercial banks costs consumers over $170 billion per year in lost interest.

“We entered into the banking space in a big way earlier this year with the launch of our own cash account,” the spokeswoman said in an email. “We are incredibly excited to continue innovation in the banking space because the opportunity and demand from consumers is enormous.”

Wealthfront markets a savings account with a 2.51% rate, which has reportedly brought in as much as $1 billion in assets since its launch in February. The average age of the Wealthfront customer is 32, the firm says, and a majority live in metropolitan areas like New York, San Francisco and Chicago.

Most Americans under the age of 35 are choosing to keep cash on hand, according to a 2018 Gallup study. That could be because many were affected by the last recession, the study suggests. It found that only 37% of adults aged 18 to 35 invested in stocks in 2018, compared with 52% in 2007.

Not to be outdone, the hybrid digital advice firm Personal Capital amassed $80 million in deposits in its cash products in just the first two weeks of its accounts launch, according to Dan Stampf, vice president of Personal Capital Cash.

“We saw a big problem: Too many individuals have cash sitting in very low interest accounts, which can hurt their ability to meet their financial goals,” Stampf said in an email.

The trend toward a single consolidated financial services provider is expected to pick up steam. Almost half of affluent clients say they would prefer a single institution to serve their financial needs and more than a quarter of clients indicate the ease and convenience of doing business is why they want a single provider, according to new research from Cerulli Associates. Clients under age 30 (66%) are the most likely to prefer consolidation, suggesting the trend will likely strengthen as firms look to serve next-gen clients.

Wealth management in some ways is letting go of its fears about commoditized advice as banking, investment and insurance converge, says Will Trout, Celent’s head of wealth management research.

“Definitely, portfolio management and maintenance has become commoditized, but goals-based advice is not, and that’s challenging for firms on two fronts,” Trout says. “How do you charge for something fairly intangible, and how do you shift your focus as advisor to generating advice around client goals rather than pushing products?”

Indeed, one executive from Fidelity at the conference said the custodian — which launched its own automated advice platform two years ago — sees the introduction of savings account offerings in wealth management as an entry point to capture customers, rather than a threat to the wealth management model.

“It’s just about being efficient in efforts to onboard customers,” according to the Fidelity executive, who also asked to not be named. “It’s an entryway. Most customers start with the basics: making sure they have a good checking and savings account is where many start.”

Wealthfront CEO Andy Rachleff has long envisioned a one-stop shop for financial services where clients can automatically deposit their paychecks, pay bills, top off emergency funds and route excess money into investing platforms. However, his firm’s ability to serve up high-yield cash accounts to clients may soon be out of his control.

“What happens if the Fed lowers their target range for the fed funds rate?” Rachleff said in a blog post. “If the rate is lowered by 0.25%, then we will have to lower the rate for our cash account by the same amount. In contrast, the vast majority of our competitors will likely lower their rates even more than 0.25%.”

Some bankers view the current spate of account offerings from digital wealth managers and even RIAs as a marketing distraction at best.

“High-net-worth clients don’t need robos advisors to begin with,” said Matt Rankin, chief technology officer and senior vice president at Amarillo, Texas-based Herring Bank. “They have different network of advisors and accountants that help them in any case.

“There’s a lot of attention on opening up an investment account with no minimum, then auto transferring whatever amount you select into your investment account. It doesn’t move the investment needle much if that’s only $100 a month,” he added.

Additionally, the choice between accounts over a couple of interest points loses relevance to a customer serious about getting the best financial advice, says Charles Beyrouthy, senior digital strategy partner at Citizens Bank.

“There are fewer degrees of freedom with checking product/savings product compared to a wealth management product, which comes with many more preferences and a higher level of client sophistication,” Beyrouthy says.

“Robos are meant to drive thought leadership, providing insight based on what the client is doing today. But at the end of the day, the wealth management customer still wants to have some contextual understanding from an advisor.”