The adoption of automated advice is quickly becoming the industry norm rather than a new trend. Market research shows that assets managed by robo advisors as a group reached $217 billion in 2016, and is projected to hit $2 trillion by 2020. Investors young and old are expressing growing interest in incorporating technological efficiencies into their financial planning, just as they have in other areas of life.
This sudden wave of high-tech advancement is not welcomed by all however. Many wealth management professionals are concerned that robo-advisors represent an imminent threat to their job security. In fact, a recent study found that 65% of industry executives predict a drop in human advisors over the next five years.
Giving up some market share to robos may be unavoidable, but losing your career is not. Not only are the planning capabilities of most robos still in their infancy, the majority of investors—including millennials—prefers a combination of automated and human advice, especially during times of market turbulence. So how can advisors work with rather than against robo-advisors? (For related reading, see: How Advisors Can Adjust to Robo-Advisors.)
The first step to taking advantage of automated advice is to build the platform. There are three main ways to achieve this:
- Customize in-house. There are several white-label service providers who specialize in building bespoke robo platforms for advisors. TradingFront, for example, allows firms to design their own website, investment model and client management portal.
- Partner with a robo. Advisors who want a less hands-on experience can opt to join an existing robo with a ready-to-use interface. There will be less room for customization, but the integration will be faster and easier. Popular choices include Betterment for Advisors, Schwab Institutional Intelligent Portfolios and TD Ameritrade Selective Portfolios. (Note: The last two are only available to advisors who custody their assets with the firm.)
- Mix and match. If adopting the whole package is not an option, consider adding capabilities one by one. Identify key tasks that could benefit from automation going forward, and find the best service provider for that task. Envestnet, NestEgg and Motif Investing all offer configurable solutions that adapt to the level of service you need.
The argument is clear for why digital-only advice is not going to supersede human planners any time soon. There is also the flip side, and that is humans can capitalize on the efficiencies of automation to rise above the competition.
Having a robo platform gives advisors a unique value proposition. It enables them to access a large market of millennials and Gen X investors who are tech-dependent. The cost efficiency is also attractive to those with smaller accounts, irrespective of age. This allows planners to scale a larger client base without hurting their bottom line.
Tri-Star Advisors, in Houston, was one of the first RIAs to partner with Betterment. It is leveraging the platform to target younger, working-age professionals. “Our current clients are mostly retirees or nearing retirement age—what you would call the mass affluents," said Tri-Star advisor Jonathan Swanburg. "Betterment has allowed us to move beyond this population.”
With Betterment, the onboarding cost is zero since clients do most of the work filling out their information, connecting bank accounts and setting basic goals, Swanburg explained. As a result, Tri-Star has eliminated its minimum asset requirement. It collects a flat fee of 1% of AUM and passes along 25% to Betterment. There is no cost to sign up or obligation to recruit clients. Counter to initial expectations, Tri-Star’s model has garnered interest from both ends of the spectrum. Their youngest robo-client is 19 years old; the oldest, 73.
By taking an approach like Tri-Star’s, advisors can serve high-net-worth clients who need full-service wealth management as well as less sophisticated investors who only need minimal guidance. (For related reading, see: 25 Companies That Offer Robo-Advisor Services.)
Simon Brady, who runs Anglia Advisors in New York, adopts a 100% paper-less model. He uses a different software for every area of running his practice, from scheduling appointments to data management to financial planning. Brady argues that there are some tasks that computer algorithms are simply better at doing. Some of these include:
The speed with which accounts can be set up online also helps Brady gain new business. He can show prospective clients their investment portfolio in real time as he is introducing products to them. “If you let clients out of your office and give them time to think about it, oftentimes they don’t follow through," he said. "With a robo I can meet a client for the first time and set up their Roth IRA in the same meeting.”
Peter Creedon of Crystal Brook Advisors agrees. His firm has been beta testing TradePMR’s new platform EarnWise. Creedon believes robos are simply tools to free up the advisor’s time for more sophisticated jobs. By delegating rote tasks to them, he can instead focus on:
- Goal setting
- Estate planning
- Retirement planning
- Debt management
- Risk tolerance management
- Behavioral coaching
- Holistic planning
- Handling sudden life changes such as divorce, death, and bankruptcy
Another distinct advantage of using Betterment or Schwab is that as the asset custodian, they provide back office support. There’s a dedicated team that handles billing, advisory agreements, standard client communications and compliance. That last function is especially important given today’s fast-evolving regulatory landscape.
Bringing the investment management experience online removes any physical barriers advisors were previously bound by. A planner in New York would have found it impractical to service clients who reside in Los Angeles. With robos and the multitude of digital communication tools available, geographical limitations are easy to overcome.
For example, Swanburg, based in Houston, opened an account for a client in Illinois who found him via an article he wrote online.
The Bottom Line
Advisors who continue to ignore the digital revolution do so at their own peril. Investors want to incorporate technological advances into their wealth management, and planners who see this as an opportunity rather than a threat will be best positioned to provide value. (For related reading, see: What Advisors Can Learn From Robo-Advisors.)