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Can the investment industry, with its deep pile carpets and mahogany paneling, stay relevant in the digital age?

Or will the younger generation – Gen Ys and the even younger Gen Zs – migrate to virtual advisers and mobile apps where they can trade a stock as easily as posting a selfie?

Investment dealers, mutual fund sellers and the big banks are scrambling to get in front of a trend that is starting with "robo advisers" – online investment advisers that build portfolios of exchange-traded or low-cost mutual funds and automatically rebalance them – and will end heaven knows where. In the process, they will be spending hundreds of millions of dollars.

BMO Nesbitt Burns Inc., the investment arm of Bank of Montreal, is said to be planning to unveil a virtual service by year-end.

"We're working on something," Charyl Galpin, head of BMO Nesbitt Burns, said in an interview. "You'll have to stay tuned." BMO already has invested heavily in technology to develop its BMO adviceDirect, which offers many of the same features as a robo-adviser except that it does not do automatic rebalancing.

But the service might not attract young people with only a couple of hundred dollars in their pockets – investors of the future.

Their hero could well be Robinhood. The free mobile app, which is not yet available in Canada, aims to be "the electronic equivalent of sitting down with a grey-haired gentlemen in a Fidelity location in your neighbourhood," Baiju Bhatt, 30, co-founder of U.S.-based Robinhood Markets Inc., said in a recent interview.

Mr. Bhatt and his partner, Vladimir Tenev, 28, have their longbows drawn, their arrows aimed squarely at the giant discount brokerage business. Robinhood's customers are young people – the average user is 26 – with no previous experience in stock trading.

"Whether they're Gen Y or Gen Z, they don't want to go into an office," said Gregory Smith, partner and wealth management advisory leader at the consultancy Ernst & Young LLP. "They want instant, self-managed access to information so they can do things immediately."

Mind you, the younger cohort still wants a brand it can trust, Mr. Smith says. The banks with their brokerage and mutual fund arms have that. They also have a huge existing client base.

Ms. Galpin of BMO Nesbitt Burns thinks Generations Y and Z have far more awareness about financial matters than previous generations had at their age. The way to reach them is through parents who are existing clients. BMO Nesbitt Burns, for example, offers a one-day financial fluency program for clients' children age 17 to 22. The program is aimed mainly at high-net-worth clients.

"It's very comforting for the parents to know their children are being taught something about finances," Ms. Galpin says. "For the children and young adults, it's an interesting way for them to get a better understanding of finances, how to think about investing and what they might have to think about when they inherit wealth."

The increasing number of high-net-worth female clients also tilts in the industry's favour, industry watchers say. It's thought that women will take a more holistic approach to investing and so will place more value on financial planning.

"Women think about wealth management differently," Mr. Smith says. "There are programs going on to make sure they hang onto those clients." Adviser teams are being encouraged to include women and younger people, which should help with client retention. Says Mr. Smith: "If you treat my mom well, I'm more likely to stay with you."

Still, there are substantial hurdles to overcome. The average investment adviser is 50 to 55, Mr. Smith says in a recent study titled: Advice Goes Virtual. Only 18 per cent of them are targeting millennials, let alone the younger Gen Z.

Then there's a potential culture clash. Different branches of the financial services industry – banking, investments and mutual funds – all have different business models and clients. New technology such as robo advisers will not only attract younger investors but also better serve the mass market, including the baby boomers, Mr. Smith says. High-net-worth clients will still be the preserve of the investment dealers, who jealously guard them. How the new technology might fit in – as a tool or a substitute for human advisers – is not clear.

Getting them while they're young is key to hanging on to the trillions of dollar of assets under management as wealth passes from one generation to the other, industry watchers say.

So Gen Y and Z clients might start out with a do-it-yourself broker, then advance to a robo-adviser when they have enough money to build a portfolio. When that portfolio grows and their affairs become more complex, someone will tap them on the shoulder and offer to introduce them to a human adviser. The more things change, the more they stay the same.

"In the meantime, there are going to be challenging days ahead for the financial services sector," Mr. Smith says.

Four key challenges

In a recent report titled Advice Goes Virtual: How New Digital Investment Services are Changing the Wealth Management Landscape, Mr. Smith of Ernst & Young looks at four key challenges to traditional investment firms posed by the shift to online services:

  • Conflict with existing financial advisers: A direct online advice offering may disenfranchise financial advisers if customers circumvent the financial adviser relationship and shift assets to the automated offering. Key questions for the investment firm: What is the right service model (automated, adviser-assisted or hybrid) across the firm’s various client segments? How can digital technology and automation be leveraged to improve advice delivery by financial advisers?
  • Limited resources and capital allocation: The high resource costs and spending associated with the new service may come at the expense of the core business. Key questions: Does this opportunity fit with the firm’s long-term financial goals? How does this investment align with the firm’s strategy, and how should the firm prioritize it against other initiatives?
  • Pace of innovation: Many traditional firms have a large amount of technical debt and legacy systems that are slow and expensive to modernize. Key questions: Does the firm have the right competencies and internal processes to deliver? Does the firm have the right people and culture to build the solution in-house (build versus buy versus partner)?
  • Pressure to bring prices down: Automation of portfolio management and financial guidance has driven the price of advice down significantly. Investment firms must develop a new pricing strategy that does not conflict with their current financial-adviser business model. Key questions: How should the firm illustrate and market its value proposition? How does digital automation change the firm’s current cost structure?

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