Banks continue to embrace robo advisers (even if customers don’t)

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About a year ago, the digital investment products team at Citizens Bank noticed that several fintech providers of robo advice had introduced high-yield cash accounts.

Citizens’ takeaway: Most of these were companion accounts, with little or no integration between the cash and investment sides. The Providence, R.I., bank decided that instead of introducing a product where rate hoppers would go for the best return, it would build a digital adviser that tied together both cash and investing, in a bid to reach customers who were banking but not yet investing with them.

“We’re not assuming the customer is ready to invest all of their investable assets immediately,” said Kate Magaram, vice president of growth and SpeciFi product manager at the $176.7 billion-asset Citizens. SpeciFi is the named shared by a pair of robo-adviser programs the bank offers, one for individual retirement accounts and the other a new cash/investing hybrid for taxable accounts.

Kate Magaram, vice president of growth and SpeciFi product manager at Citizens Bank
Citizens Bank's reimagined robo adviser, SpeciFi Save & Grow, lets customers decide how much money they want to keep in cash before the platform automatically sweeps excess to the investing side, said Kate Magaram, the bank's vice president of growth and SpeciFi product manager.

The consulting firm Oliver Wyman found that about 80% of the top 15 consumer banks offer their clients a robo-adviser option right now.

For banks, adding robo advice to their suite of services “is increasingly table stakes,” said William Trout, head of wealth management at Celent.

Citizens Bank and Citigroup are among the banking companies that have infused resources and energy into in-house robo advisers recently, despite overall tepid demand for such products.

There are several reasons banks should consider building a robo adviser, mainly for long-term rather than short-term strategizing.

One major goal is to stem the flow of assets toward independent robo advisers such as Betterment or Wealthfront while catering to younger, tech-savvy clients who have thousands or tens of thousands to invest rather than several times that.

But depending on the bank, the target audience isn’t limited to customers in their 20s and 30s. Some banks are looking beyond millennials to consumers in all age groups who are seeking a modest return on their money.

With deposit rates being so low, “Customers need more growth to achieve long-term goals,” said Aaron Fine, partner and head of retail and business banking practice, Americas at Oliver Wyman.

Competition is rising from the robo side as well. Platforms such as Betterment, Wealthfront and Ellevest have either set up — or have imminent plans to debut — their own banking services.

Banks are hoping that their customers will still be more likely to stick with their offering.

“There's a certain level of convenience that comes from having your relationship with one place, and a certain level of trust that people have with their banks versus a Betterment or Wealthfront,” Fine said.

Despite economic uncertainty during the pandemic, the need for help with investing hasn’t waned. Automated rebalancing takes the emotion out of investing for clients worried about playing a volatile market.

“We have seen self-directed investors, the type that goes to robo advisers, a lot more active in the pandemic,” Trout said.

Still, even as banks have increasingly rolled out these automated platforms over the last few years, demand among customers has been muted.

“I think the adoption is fairly low, frankly,” Trout said. “They are targeting a segment that doesn’t have a lot of disposable income. There are also problems of inertia and the need to save for a rainy day, so a lot of investors don’t get around to actually setting anything up.”

But when banks’ robo advisers are a defensive strategy, that’s not necessarily a problem.

“As long as the option is there and the customer doesn’t leave the bank, the bank is happy,” said Trout. “This is also about keeping the customer in a relationship with the bank 20 years from now when they have a mortgage and need insurance and have kids they want to send to college.”

Two banks are forging ahead with relatively new robo services: Citizens Bank, which introduced SpeciFi Save & Grow in late April, and Citi, which debuted Wealth Builder in late January.

Citizens Bank: Cash for today, growth for the future

A total of 21 focus groups and three quantitative studies that Citizens Bank conducted in 2019 revealed that customers wanted help with investing for their futures beyond their 401(k) accounts.

This propelled the digital investment products team to build on SpeciFi, the digital investment advice platform it launched in 2017 with the investment platform SigFig, to create the next iteration: SpeciFi Save & Grow. SigFig serves as the bank’s technology partner, while National Financial Services is its custody and clearing partner and executes its trades.

The original SpeciFi is now available as SpeciFi IRA, where customers can invest in traditional, Roth and rollover IRAs. SpeciFi Save & Grow layers a cash component onto the investment account.

Customers can decide how much money they want to tuck away on the cash side (recent yield: 1.25%) for near-term needs. Any excess funds, such as interest, dividends or new contributions, will be automatically swept to the investment side on a daily basis to help meet long-term goals. The minimum investment requirement is $2,000.

“We heard from customers that above everything else, they wanted to make sure they had that control,” said Magaram. “Some think about the cash piece as an emergency fund, but for others it was where they wanted to save for near-term purchase or just money they are not ready to invest. We wanted to recognize the cash portion could be used for different purposes based on the customer.”

Citizens declined to supply exact figures, but said it has seen an 80% increase in the proportion of customers setting up automatic contributions in Save & Grow compared with those who have automatic recurring contributions in non-Save & Grow SpeciFi accounts. Customers can transfer money from any eligible bank account linked to Citizens Bank Online, not just Citizens Bank accounts. The bank also said the growth during the pandemic, even before Save & Grow was launched, was particularly strong.

“I’m sure we’re seeing people invest with us now for a variety of reasons,” Magaram said. “Many probably see an opportunity to get into the market during this period of volatility, while others may see wisdom in having their investments professionally for a low fee or just want to take the emotion out of investing. With Save & Grow, we’ve seen customer interest in utilizing both the investing side and the cash side, which I suspect reflects that it feels more important than ever to have an emergency fund or a cash buffer.”

Citi: Aiming for emerging affluent clients

Citi introduced Wealth Builder at the end of January, with a minimum initial investment of $1,500 and no advisory fees for Citi Priority and Citigold clients’ first accounts.

After answering a questionnaire that assesses their risk tolerance, goals and current savings, customers will be matched with one of six portfolios. Wealth Builder will automatically rebalance portfolios, which, like Save & Grow’s portfolios, are made up of exchange-traded funds.

Citi partnered with the digital wealth platform Jemstep to create Wealth Builder, which is one of several recent initiatives aimed at Citi Priority clients, including the expansion of financial-planning services from Citi Wealth Advisor.

“Citi Wealth Builder is one way for us to up the ante in wealth, by making retirement investing simple as we enhance the value proposition for our emerging affluent clients,” John Cummings, head of Citi U.S. consumer wealth management, said in an email.

One of the target audiences is Citi Priority clients who are young, digitally savvy and draw a high income, “to help them deepen relationships with us as they grow their wealth and become Citigold clients,” he said.

Like the team at Citizens, Cummings says Citi customers will find value in keeping their deposits and investments in one place. Although Citi has temporarily dialed down marketing of Wealth Builder during the pandemic, the bank reports that assets under management average about $10,000 per account so far.

“People tend to panic during volatility and pull out money from the market, especially if they don’t have an adviser, which can damage their finances long term,” Cummings said. “Citi Wealth Builder gives people an option to stay invested in the market with the peace of mind knowing that their account is being monitored.”

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