Wayne Patenaude, the chief executive of Cambridge Savings Bank, was surprised by what he learned from the research his bank did before it began offering wealth management to retail customers earlier this year.
Setting up an advisory shop has long been a way for retail banks to boost fees, and Cambridge Savings also wanted to attract the growing number of young, well-heeled professionals in its suburban Boston market.
That kind of business has typically relied on tailored advice delivered in person, but prospective customers were sending a different message in surveys: Make it digital, and let us do it ourselves.
"Initially, we anticipated supporting the branch network with a team of traditional financial advisers," Patenaude said.
What the $3.2 billion-asset bank did next is a bellwether for the rest of the industry.
Rather than hiring advisers, the bank announced a partnership with SigFig, a robo-advisory startup in San Francisco.
Though once skeptical of robo-advisers, more bankers are starting to embrace them. This change in attitude is helping contribute to rapid growth in what is still a small segment of the market.
Though robos — which provide algorithm-driven investment advice — make up a small portion of the market, they are projected to grow into a $7 trillion industry in the next decade, according to research from Deloitte. That would equate to 15% of all U.S. retail assets under management.
Most of the big names in U.S. retail banking — Bank of America and Wells Fargo among them — are expected to introduce robo products in the coming year, marking what many experts describe as a seismic shift in the wealth management business.
"We do not expect to see any major player that does not have some sort of robo by the end of the fiscal year," said Kendra Thompson, North America lead for wealth management with Accenture. "All of them — all of the big ones — have big plans in the works."
Tim Sloan, president and chief operating officer at Wells Fargo, said customers are simply demanding to manage their assets on their own time. Wells Fargo plans to oblige by releasing a robo product in early 2017.
"If that's what they want, that's what we're going to give them," Sloan said.
Regional banks are getting in on the action too. Capital One Financial launched a robo operation in June. U.S. Bancorp expects to announce a partnership with a robo firm in the next year. KeyCorp is actively exploring robo options.
Ally Financial — which, as an online-only operation, could be a natural fit for robo services — began moving in that direction in April with its acquisition of TradeKing.
The moves follow the entrance of a number of foreign-owned banks such as UBS and BBVA and large investment firms such as Charles Schwab and Vanguard into the market.
In some ways the rise of robos in the banking industry is a familiar tale of fintech disruption: Silicon Valley whiz kids are out to change the stodgy, old wealth management business.
Robo-advisers provide automated investment advice based on factors such as a customer's age, income and tolerance for risk. They typically invest in exchange-traded funds.
Many of the top robo firms in the market were established after the financial crisis. They have attracted investors both by charging low annual fees and providing slick, easy-to-use digital products.
Despite their impressive growth, they are relatively tiny.
For instance, Betterment — one of the biggest robos in the market — says it has about 175,000 customers and $5 billion in assets under management. Wealthfront, another popular firm, is about the same size.
Collectively, robo advisers manage about $45 billion of assets, according to BI Intelligence. By comparison, most of the major advisory firms in the market manage several trillion dollars in assets.
But what's caught the attention of bankers is the ability of robos to attract a valuable customer group — the "mass affluent." The term is used loosely in the industry, but typically refers to customers with net assets between $250,000 and about $3 million.
Robos also have gained traction among young professionals between 25 and 45 years old, according to a recent report from Celent.
"These are the most profitable relationships that a bank has," said Gauthier Vincent, head of U.S. wealth management at Deloitte.
A 'Hybrid' Model
Most banks with an interest in robo are betting that tech-savvy investors will want to chat with an adviser at some point.
One of the key challenges facing the industry is providing clients with the right mix of automated and in-person options, bankers said.
Several banks are looking for ways to provide so-called "hybrid" advice to their customers, according to recent interviews. The idea is to provide customers with the ability to access planning services both online and in person.
"You're going to have some mass-affluents that want to use a robo-advising option. Some are going to want one of our advisers," Sloan said. "That's fine, because that's what they want to do."
Several bankers said they expect customers would use a robo product to diversify their portfolio. But they would make an appointment with an adviser to discuss more complicated questions — perhaps about estate planning or philanthropy.
"We don't think that it will replace an adviser, but it will augment what an adviser does," Mark Jordahl, president of wealth management at U.S. Bancorp, said of the robo option.
U.S. Bancorp plans to announce a partnership with a third-party robo-adviser in the next 12 months, Jordahl said. He declined to provide additional details.
Down the road the Minneapolis company — like many of its competitors — expects to offer additional wealth management services using digital platforms. A robo partnership is just the first step in that direction, Jordahl said.
Other bankers were hesitant to discuss their robo plans, but they emphasized the importance of using technology to enhance — rather than replace — the work of financial advisers.
"I think of it more as the fusion of advisers and technology," said Terry Jenkins, president of KeyCorp's private bank unit.
Jenkins added that Cleveland-based KeyCorp is "certainly exploring" a robo offering, though he, too, declined to provide additional details.
Underpinning the rise of robo is a broader change in the way banks charge fees for financial advice.
For decades, customers have been "price takers" in the market, experts said. Faced with few alternatives, they paid a market rate for financial advice — often around 1% of assets under management, plus additional fees.
Low fees are a key selling point for many robos. Several popular robos charge annual fees ranging from 0.15% to 0.35%.
So now, just like many other financial products, advice is becoming a commodity in the market.
Those with smaller amounts to invest, in particular, always have been less willing to pay for advice, but even more so these days when a basic plan can be generated by a computer program.
Thompson said these investors have been "over-feed and under-serviced" by the advisory industry for years.
The big question facing the banking industry is, "What should advice be, and how much will people pay for it?" she said.
Vincent said the main challenge for banks in the coming years will be to find ways to differentiate themselves.
"It's not that investors are not willing to pay for value — it's just that they want value," Vincent said.
Equalizer for Small Banks?
When executives at Cambridge Savings talk about their new robo product, it's easy to mistake them for the founders of a hot new startup, rather than the leaders of a 182-year-old bank.
Cambridge Savings was one of the first banks in the industry to announce a robo deal, signing on with SigFig in May. The community bank beat most of the industry's biggest players in getting into the business.
"As a smaller organization, we have the opportunity to be much more nimble," said Dan Mercurio, who heads consumer and small-business banking for Cambridge Savings.
The partnership offers a glimpse of potential opportunities ahead for small banks — a way to access technology they might not be able to afford otherwise.
After reviewing market research, Cambridge Savings realized that succeeding in the investment advisory business required a tech-focused mindset.
Customers said they wanted sound financial advice, but also high-tech features, such as a modern interface and mobile access.
The partnership allowed Cambridge Savings to offer "elegant" digital features that it would have been unable to develop on its own, said Mike Sha, founder and CEO of SigFig. "If you're a small or medium-sized bank, you don't have a team of 300 engineers working on your website," Sha said.
Cambridge Savings declined to discuss the financial details of its arrangement with SigFig, though Patenaude said it wasn't "a huge financial investment." The bank also declined to discuss the initial performance of its new robo service.
Under the agreement, SigFig serves as the bank's registered investment adviser. The bank offers the robo platform under the brand "ConnectInvest" through its online and mobile channels.
Cambridge Savings requires a minimum deposit of $2,000, and charges an annual management fee of 0.5%. Other ETF-related fees also apply.
Before launching the robo service, the bank did not offer wealth management to its retail customers. That worked in its favor, executives said.
"A lot of banks are saddled with the dynamic where they have a retail investment program in place," Mercurio said. "We were able to build it with today's consumer in mind."
Other small banks may have a harder time switching gears and investing in robo, experts said. Many simply lack the resources.
"Small banks are going to struggle," Thompson said.
More Bank Partnerships
Shortly after announcing its partnership with Cambridge Savings, SigFig signed a separate agreement with UBS. Other banks are said to be in talks with SigFig, which declined to confirm any names.
Sha said that working with banks allows robos to quickly expand their customer base. So competition is heating up to build "the best platform possible," with hopes of winning over once-skeptical banking executives. "They may have large customer bases, and huge amounts of money to spend on brand building," Sha said. But "they aren't able to attract the best engineers and designers."
Robo-advisers are just one aspect of a much broader shift in the wealth management business. "Pretty much all wealth organizations are in the early stages of a major, transformative journey into digitally led" advice, Thompson said.
In addition to computer-generated robos, banks are working with startups on ways to give advisers help with the highly tailored advice they give wealthy customers in person.
U.S. Bancorp last fall announced a partnership with Motif Investing, a startup in California. The partnership is meant to serve clients of Ascent Private Capital Management, a subsidiary of U.S. Bancorp with customers who average about $200 million in net assets.
Dan Rauchle, chief investment officer at Ascent, said banks really need to respond to disruption in the industry.
"Do we sit and wait for an Uber to come in?" he asked. "Or do we try to find these little fast-moving companies and somehow marry those capabilities with our capabilities?"
Motif isn't a robo; rather, it's an online brokerage that helps investors craft portfolios of stocks and ETFs based around a particular investment theme.
For instance, doctors may want to invest in companies that focus on minimally invasive surgery. Or environmentalists may want to invest in companies that are using new technology to conserve water.
"We're revitalizing [thematic investing] with technology," said Hardeep Walia, Motif's founder and CEO.
Motif has generated some buzz in the banking world. Goldman Sachs and JPMorgan Chase are among its shareholders.
Ascent has used the Motif platform to craft a handful of investment themes that are expected to drive long-term growth — and that may ultimately "change the world," Rauchle said.
Those themes include the re-urbanization of America, the maturation of the Chinese economy, and the U.S. energy revolution.
Opportunity and Uncertainty Ahead
Several forces are driving the rise of robo-advisers — along with other types of digital advice — in the banking industry.
New regulations are one factor. The Obama administration this spring issued a rule that will require advisers to work in the financial interest of their clients. This legal change is widely expected to increase costs for advisers and make serving smaller investors less profitable.
"It's part of the story, though I don't think it's the most important driver," Vincent said, adding that the regulations likely accelerated the move toward robo advice, but new technology and new consumer attitudes are the main reasons behind the changes in the industry.
Despite the hype around robos, bankers and advisers have reason to remain skeptical of the upstart industry. A key concern is that robo advisers have not yet been tested by a significant downturn in the market.
Mary Callahan Erdoes, JPMorgan Chase's head of asset management, raised this concern late last year
"Robo-advisory is nothing but algorithmic generation," Erdoes told Bloomberg News. "Leaving that solely in the hands of an investor, it can work. But it's unlikely to work as successfully in a bear market as a bull market."
A spokesman said JPMorgan Chase has no immediate plans to offer a robo product.
But even if robos may yet run into challenges, they nonetheless represent a major advance in the longer term shift toward providing digital advice to customers. In the coming months and years, bankers will continue to wrestle with how exactly to provide a robo product and charge a competitive fee.
"This is the first iteration — just the beginning — of the next 20 years in our industry," Thompson said, describing robo as a "major kick in the pants" for wealth managers.
U.S. Bancorp's Jordahl agreed. "In the industry we call this a moment of truth," Jordahl said. "We think the next five years will be very, very exciting."