What Digital Transformation Means and Why It’s Critical for Advisors

Updated: Dec 17, 2019



Both plan sponsors and plan advisors are realizing the critical role financial wellness technology plays in helping participants prepare for retirement. Financial wellness is the foundation for being able to save adequately for retirement, while financial wellness technology makes the process easier and more convenient for everyone.

Plan participants who are living paycheck to paycheck and struggling to manage their monthly finances are not likely to contribute to their employer’s retirement plan. And those who are struggling the most are costing their employers the most in terms of lost productivity, higher healthcare costs, absenteeism, and turnover as they leave to seek higher-paying jobs. Employees who are not financially prepared for retirement and continue working because they have to, not because they want to, may also be less motivated and consequently, less productive.

What does financial wellness technology in the context of digital transformation mean for financial services in regard to retirement planning and advising? First, let’s define the term.

What exactly is digital transformation?

Digital transformation has become a buzz phrase. It’s a multifaceted concept defined as the application of digital capabilities to processes, products, and even financial assets—for example, blockchain and cryptocurrencies like Bitcoin. The goals of digital transformation include improving operational efficiency, enhancing customer experience and value, managing risk, and discovering new opportunities for monetization. Based on this broad definition, it is clearly applicable to a wide range of businesses across many industries. But digital transformation is more than just updating an old IT system.

A familiar example is in the public sector. Many state and local governments are automating processes and moving citizen transactions to the cloud, eliminating formerly lengthy wait times on the phone or in person with self-service portals. Instead of standing in line at the DMV or local office of revenue, people can now renew their vehicle registration and pay personal property taxes online anytime, anywhere. A major impetus for digital transformation efforts, in addition to improving customer experience, is the anticipated cost savings. One study estimates that governments worldwide could save roughly $1 trillion—annually.

Another way to think of digital transformation is simply as the realignment of or new investment in technology and business models to more effectively engage people at every touch point in the customer experience lifecycle. Banks are a good example; many traditional banking services are now available online, and some institutions are adding personal finance tools as a way to attract and retain customers by providing added value. Technology can deliver a more personalized experience and provides a scalable way to reach customers individually and offer guidance based on their situation.

For retirement plan advisors, digital transformation can be a way to avoid having their business disrupted by adapting to changing consumer expectations and giving clients and participants a better, more personalized experience. Client touch points can be increasingly proactive rather than reactive. For example, an advisor could more easily see that a participant has experienced a new life event and then quickly reach out with information or an invitation to schedule a phone meeting. As competition for new business increases, offering such a higher level of customer service can help firms stand out in an increasingly crowded market to keep current clients and win new ones.

Why digital transformation is necessary

Digital transformation is needed for multiple reasons, including consumer demand and evolving business models. While trends such as process automation were once viewed as cutting-edge, it’s no longer considered an innovation. It’s a necessity for every financial services firm.

Consumer demand from both participants and advisors

A growing number of people now expect a digital experience from all their financial services. In fact, 56% of clients between the ages of 30-40 say that a comprehensive digital experience is highly important, according to a 2018 survey from Wealth Management magazine. And consumers are backing up their words with behavior. According to a 2017 PwC study, 46% of customers are skipping bank branches altogether, relying instead on smartphones, tablets, and other online applications. The same study also reported that a direct-to-consumer insurer beat out traditional firms in a major customer satisfaction survey. And of course there are the millennials, well-known for preferring digital experiences as the first generation to have grown up with readily available digital consumer technology. The study also noted that more firms are turning to vendors for technology solutions instead of building their own.

Another example of digital transformation at work is the trend of asset managers moving aggressively downmarket with advice. Technology is enabling a new level of service that was once offered exclusively to affluent or mass affluent clients. Although robo-advising services have managed to capture only a small share of the market, roughly 1% of total AUM, a hybrid approach combining the power of algorithms with access to human advice is becoming more popular, and is expected to capture 10% of the market by 2025.

Of course, financial planning software is now an essential tool for every advisor, not to mention back-office automation. Projecting the long-term impact of different scenarios is necessary for any client to make a sound financial decision, and it’s far too complex to be done without the help of technology. Good technology fills the gap by crunching the numbers to calculate projected outcomes, so that a client can evaluate the consequences of various financial scenarios to make better informed choices.

Evolving business models

Early efforts in digital transformation focused solely on automating processes which, with the rise of ETFs, led to the development of robo-advising. More recently, however, customer satisfaction research consistently shows that millennials, who are digital natives, prefer a hybrid approach that blends self-service, anytime, anywhere access to tools and information with access to human advisors who can give personalized advice tailored to the individual’s situation. Even early robo-advisors such as Betterment have since adopted the hybrid model.

According to a 2019 report from the Certified Financial Planner Board of Standards, financial advisors remain the primary resource for delivering financial advice, despite the availability of fully automated digital solutions. But clients do expect technology to be part of their relationship with advisors. The report showed that consumers want to have an integrated solution when getting financial advice as part of a “digital financial advice ecosystem,” the group concluded.

“Clients expect and deserve a human-powered, digitally enabled solution to their financial needs,” says Kevin R. Keller, CEO of the board. “Financial advisors who utilize technology as a tool in the client-advisor relationship can differentiate themselves and create more meaningful, deeper conversations and longer-lasting relationships that produce better outcomes.”

Digital transformation is already affecting client acquisition, management, and retention for retirement plan advisors and wealth managers, and business models are changing in response to new technological capabilities. According to WealthManagement.com, the two most common reasons advisors are willing to invest in upgrading their technology are to make their own workflows more efficient and to better serve their existing clients. Including financial wellness technology as a core component of digital transformation can perform both these functions by increasing a firm’s scalability, while at the same time helping to qualify potential new clients.

For example, firms are using financial wellness technology to scale advisor efficiency and reach with configurable self-service portals, simplified advisor-plan participant communication, calculators, and actionable content. Because these kinds of features can be used by existing clients and employees in 401(k) plans, offerings like these can be a powerful differentiator for plan advisors looking to attract new plans and retain existing ones. According to Prudential, 82% of employers believe they can benefit from a financially secure workforce, and a majority are interested in providing financial wellness tools for their employees because it’s the right thing to do.

There is also a growing trend towards one-stop shopping for employee benefits, retirement, wealth management and insurance, all under the same umbrella and enabled through technology. This all-in-one approach allows for total human-capital risk management, and is appealing to employers while offering the potential for better outcomes for employees. As advising is increasingly moving towards a fiduciary, fee-based business model, firms may benefit from cross-selling opportunities.

In our next two posts, we’ll look at common challenges firms encounter when attempting a digital transformation, and then key considerations to keep in mind when developing a digital strategy. We’ll also provide a checklist for success. Stay tuned!

Read more on Digital Transformation in our new white paper, "Doing Well by Doing Good:The Key Role of Financial Wellness Technology in Digital Transformation for Advisors."

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