How automated solutions enable simple and transparent investment services

How investment services are becoming more accessible and intuitive for both consumers and neobanks thanks to innovative investment services. 

The desire for “transparency” is a worldwide consumer trend across all industries. According to the Edelman Trust Barometer, mistrust is continuing to grow in a world still very much in the grip of the COVID-19 pandemic. Consumers increasingly want to know more about the companies they do business with, and about the specific products and services they invest in. Their interest varies from the company ownership structure, the remuneration of top management, and corporate policies to labor conditions, production processes, and ESG.  

Consumers also demand full transparency regarding prices and product features with the ultimate goal of finding the best, cheapest, or most ethical offer. Today, there is an ethos of “what exactly am I paying for (and what am I not paying for)?”  

So, in a world of consumers demanding more transparency over funds and simplicity of services how can neobanks offer their customers trustworthy (and competitive) financial products? Read on to learn more. 

In search of simplicity 

Consumers are crying out for simplicity 

The key consumer insight that drives the simplicity trend is choice and information overload: in an increasingly complex world, consumers are often overwhelmed.  

On the one hand, simplicity is about looking for ways to reduce effort and save time. Consumers prefer products and services that are easy to understand quickly. When they make purchase decisions, they strive for well-informed and transparent—yet simple— decisions with a high probability of them being the right decision for them. They just want to get it over with and not be overloaded with information.  

For most consumers, time is the most important currency. When they buy or subscribe to something—such as a new digital-first bank, for example—there’s a “plug and play” mentality and a strong desire to have the product up and running within minutes without having to read an exhaustive manual. When consumers are selecting investment services, they want to be sure that when they have a question or an issue, they will be able to contact the helpdesk easily and understand the help procedure without too much hassle.  

On the other hand, simplicity is also about consumers increasingly feeling that less is more. They consider many choices to be unnecessary. The credit crunch allowed this group to thrive and grow in their new lifestyle of discretionary thrift, and COVID-19 has further driven this trend. We can see people who opt for austerity prefer simple products. Many of these consumers will have found that simpler and cheaper products are in fact not that bad at all and—in many cases—make their life more convenient.  

Investment services made simple for consumers 

More than products or models, financial advice is about helping clients reach their goals. Customers are paying for you to manage their funds, but they are also paying you for transparency, simplicity, and peace of mind 

Clients consistently request more simplicity and transparency (which we will get to in a minute) from their investment providers. They want to have frank conversations about the pros and cons of various investment strategies in terms they can understand. So why shouldn’t you offer that discussion upfront, as part of your services? Clients deserve to understand the pros and cons of any approach that is presented to them, as well as all fees and other potential costs—such as lack of liquidity and taxes. Financial providers need to be able to explain issues clearly so customers have a clear understanding of their finances. More importantly, when you put finance in simple terms, you can increase not just their understanding but also their faith in the investment vehicles they’re using. 

Today, investment services are becoming increasingly accessible to users through robo-managed accounts. These automated and user-focused investment services have erupted in popularity in recent years thanks to their ease of use, personalization, and use of the latest technologies—including AI, machine learning, simple intuitive user interfaces, and middleware to connect everything up.  

Most robo-advisors use mutual funds or ETFs—rather than individual stocks—to portfolios and keep them simple for consumers. They typically follow an index fund or another passive investment approach based on modern portfolio theory research. Depending on the robo-advisor, customers may also be able to further specify investments by social values, and environmental concerns. 

Robo-advisors are simple for neobanks as well 

Neobanks can offer customers investment and portfolio services by adding innovative software solutions to their existing financial toolkit without overhauling their internal systems. Fintech middleware is making this possible thanks to white-label add-on robo-advisors—such as Wealth Kernel and Investsuite’s white-label robo-advisor solutions (and, of course, our own robo-advisor). These kinds of services offer seamless investment experiences to customers, and they can be readily added to existing mobile banking apps or built as stand-alone tools.

Since robo-advisors are specifically designed to be incorporated into a neobank’s existing suite of banking products, they help neobanks grow with their existing customer base. Along with other add-on services, they can be used to build up a multi-layered banking-as-a-service platform that fulfills all a neobank’s customer needs. What is more, neobanks can combine these ready-to-go solutions with their existing customer data and bring a wholly new, innovative, and highly competitive investment solution to market quickly. 

For neobanks looking to add an automated investment product, a white-label robo-advisor may be an ideal choice. They are “plug and play” ready and the fintechs providing them typically manage compliance and regulatory oversight. Having the necessary niche expertise in key areas like MiFID II, asset management, depository operations, and local taxes enables these fintech providers to deliver robo-advisors “as a service” that is fully managed and compliant. This makes it potentially even simpler for neobanks to add an investment service to their product suite, plus this helps to alleviate any compliance-related headaches.  

In search of transparency 

Transparency is driving investment choices 

Financial executives usually think about transparency in terms of the balance sheet. Are all obligations on the balance sheet or are there any so-called off-balance sheet items? That is—of course—a different perspective than the one the consumer uses. For consumers “transparent” equals “easily seen through”, “readily understood” and “free from deceit”. Transparency is about openness and making things clear by providing information upfront.  

Transparency should allow consumers o evaluate an investment in all areas relevant to them. Information about a company’s philosophy, what it does with the customers’ funds, and the financial stability of the company are all important factors for consumers when selecting stocks to invest in. Recently, ESG has become a highly popular driver of investment choices, showing that consumers are looking at how their investments impact the environment and not just their wallets. 

Consumers move towards transparent investment products 

Private banking investors are developing a preference for the more basic asset classes such as government bonds, ETFs, and mutuals. By contrast, complex investment products are becoming less popular with the majority of high street investors. The 2008 crisis made it crystal clear that consumers—and relationship managers—were often unable to cope with the sheer complexity of certain offerings. Fast forward a decade and consumer preferences for clear, upfront products that answer their questions and concerns before they invest their money continue to grow in popularity.  

For most clients, simple, well-structured solutions are best. People no longer want to invest in products they do not understand. In a category as varied as investments, we already see an increase in index funds, “plain vanilla” funds, and trackers. Trackers—which follow an index, commodity, or another asset category—are attractive because of their relatively low cost and easy access to normally inaccessible markets. Especially in the United States trackers have a very high penetration in both the institutional and private markets. In Europe, their popularity is growing rapidly too. Not that this makes banks and investment firms happy, but that is mainly due to lower product margins. 

Transparency extends beyond funds as well. On the whole, consumers increasingly prefer investments that clearly outline details of their performance potential—including risks and earnings as well as the companies the fund invests in. Many new investment funds—including many robo-advisors—are upfront about company branding, message, mission, and environmental policy so customers have the information they need to make investment decisions. Again, this contrasts sharply with traditional investment firms and brick-and-mortar banks. Nevertheless, it’s the preferred choice among consumers.  

Automated investments are transparent for neobanks too 

Neobanks considering adding a robo-advisor to their products list can look forward to low fees, a low cost threshold, and back-end ease of use. Thanks to their design and automated trading routines, robo-advisors charge lower fees and require minimal human supervision once they’ve been set up. A neobank can manage significantly more portfolios through automation than a traditional human financial advisor could. This means that while the fees per portfolio are comparatively lower than a financial advisor, more portfolios can be managed, and this offers up a scalable (and attractive) growth opportunity. Indeed, the robo-advisory industry surpassed $220m AUM in 2018 and it’s expected to reach $1.3 billion in 2021. 

If you are looking to add a robo-advisor to your services, there are a few things to look out for. Firstly, white-label robo-advisors should include a fully customizable front-end. This can ideally be based on your user experience best practices and it can be customized to meet your brand values. A white-label robo-advisor should also come with the option to be set up as a separate application or integrated into your existing website or app. In the back-end, the robo-advisor should be clear and easy to navigate for account managers. A user-friendly interface should allow you to configure all of your investment policies as well as model portfolios and optimize them, including settings and constraints. 

What is more, robo-advisors typically come with full control over the parameters that impact portfolio construction. This means you can define and set the end client’s personalization framework, set your existing risk profiling process, offer in-house or third-party funds that follow a predefined model or an off-the-shelf customized portfolio. And, of course, you can set your own pricing framework too. 

Robo-advisors simplify investments for consumers and neobanks 

Technology can help neobanks to convert passive customer savings into profitable investment assets. Neobanks are often well-positioned to take advantage of the opportunity robo-advisors present thanks to already embedded client relationships.  

The first generation of digital natives is already shaking up the wealth management industry. At this point, it’s just a question of getting caught out by the shift—or being part of it. 

Visit our robo-advisor page to learn more about how you can easily add our white-labeled solution to your existing banking service or as a standalone app and open up investing to your customers.