Tech giants face barriers if tempted to enter advisory market

Does Jeff Bezos have designs on the digital financial advice market?

Last month, the Wall Street Journal reported that Amazon was in talks with several large banks over a potential new checking option the online retail gargantuan could pitch to its customers.

That report raised speculation that Amazon’s potential foray into finance would ultimately result in a robo-advisory platform. Estimates put the number of Amazon Prime members at 65 million.

As the so-called FAANG companies—Facebook, Amazon, Apple, Netflix, and Google—have steamrolled legacy industries and staked monopolistic claims on the advertising, retail, and media markets, the prospect that the largest technology companies will take aim on the retail investment market is seen as inevitable by some industry watchers.

But analysts at Cerulli Associates, a research and consulting firm to the financial services industry, say tech giants face real barriers to the financial advice market, in spite of their billions of users, purchase on artificial intelligence, and seemingly infinite troves of cash.

For one, the digital advice market is proving to be less expansive than tech evangelists originally assumed.

Cerulli’s research shows that only 12 percent of investors that currently use the range of brokerage and advisory options are likely to invest through a pure digital platform.

That “limited market” presents an obstacle for tech companies, according to the April issue of The Cerulli Edge.

While the tech giants have realized explosive growth by using technology to bridge previously unmet consumer demands, the financial services industry isn’t failing to meet consumer demand. “Thousands of firms” offer “nearly every imaginable service model,” note Cerulli’s analysts.

Moreover, trends in passive investing, litigation in the defined contribution market, and regulatory initiatives like the Labor Department’s fiduciary rule have put the cost of investment products and services under the scope, and conspired to lower both investors’ costs and providers’ margins, arguably leaving tech giants with less ability to compete on price.

“The financial industry’s margins are already in decline,” writes Cerulli. “Becoming a late entrant in a declining-margin business offers little appeal to large, profitable technology providers.”

Humans want humans

While consumers of all ages have warmed to Amazon’s online retail model—the average non-Prime member spent $700 in 2017, the average Prime member spent $1,300–investors may be less willing to hand over their life’s savings.

“An impulse purchase through Amazon can be easily returned, but a financial advice relationship is inherently meant to be long term and requires consumers to believe that a prospective provider has earned the trust to put investors’ best interests first,” says Cerulli.

Then there is the question of regulatory requirements. As Facebook, Google, and Amazon are under more scrutiny than ever from lawmakers, they may be reluctant to invite more from the SEC and FINRA.

FAANG companies’ “overriding fiduciary duty is maximizing current shareholder value, not helping prospective retail investors achieve their retirement dreams,” the report says. “Maximizing profits does not necessarily correlate with creating long-term trust in potential investor clients.”

But tech companies’ prevailing obstacle to the retail advice market may be best explained by how investors choose their investment services. Personalized attention ranges among the top criteria for investors’ choice of providers, Cerulli’s data shows.

The early experience of automated platforms underscores the role advisors play putting investors on the right course.

“Even investors who thought they would prefer purely digital self-service relationships frequently want discussions with human advisors,” Cerulli’s report says.

Vanguard’s robo-platform, the largest in the market with more than $100 billion in assets under management, added a human component in 2015. “Rather ironically, one of the biggest challenges this ‘robo-advisor’ platform faces has been hiring enough financial planners to handle the influx of investor inquiries,” writes Cerulli.

To date, one online retailer, Overstock.com, has rolled out a robo-advice platform. tZERO Advisors intends to tap into the website’s largely female customer base. Investors pay a $9.99 monthly subscription fee and are invested in individual securities. Rolled out earlier this year, the firm currently manages about $22,000 in client assets, according to a March 30 Form ADV filing.