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AUGUST 03, 2015
RIAs Shouldn’t Fear the Robots
Rather
than regard robo advisers as the evil competition, financial planners
should embrace them as a service to offer and attract clients.
By Dan Weil
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PHOTO CREDIT: SANA IMAGES |
Automated investing services,
known as robo advisers, are a cause célèbre for many in the financial
planning world. How should registered investment advisers respond?
Positively, industry professionals say.
“I think registered
investment advisers should embrace robo advisers as not only
inevitable but in some ways beneficial to the customers they serve,”
says Tom Fredrickson, a financial adviser based in Brooklyn, New York.
“What are robo advisers but a faster, more accurate method of data
analysis and management than human beings can execute?”
A
survey commissioned by Jefferson National, a Louisville,
Kentucky–based firm that offers investment programs to RIAs, shows
that the highest-earning human advisers are the most proactive in
adopting new technology, including robo advisory services. “The
most-successful advisers understand that, rather than a threat, robo
advisers are in fact an important part of a comprehensive offering,”
says Jefferson National CEO Mitchell Caplan. He and other financial
advisers stress, however, that robo advisers don’t eliminate the need
for human advisers, who — unlike an app — offer a nuanced take on a
client’s needs.
“Many clients will still want
and need the human touch to get going and stay the course,”
Fredrickson says.
As of year-end 2014, 11 of
the largest robo advisers managed or advised on $19 billion in assets,
up from $11.5 billion eight months earlier, according to research firm
Corporate Insight. Analysts at consulting firm A.T. Kearney estimate
that by 2020 robo advisers will manage about $2 trillion. Presently
robo advisers have about $30 billion in assets under management,
according to A.T. Kearney.
Robo
advisers attract customers and invest for them via websites. Investors
begin by responding to a few questions concerning their age,
investment aims, risk parameters and current wealth. After crunching
the answers the robo adviser offers a portfolio of
exchange-traded funds, which, if the client accepts, are then
purchased and managed. The fees generally come to about 0.25 percent
of an investor’s assets per year for the robo adviser and an
additional 0.1 to 0.25 percent for each ETF. That puts the total fee
paid by investors at 0.35 to 0.50 percent.
“Robo advisers will put fee
pressure on human advisers,” says Kenneth Landgraf, president of
Kenjol Capital Management, a wealth management firm in Austin, Texas.
“For someone who wants a pure low-cost adviser, there you go.” But for
someone with $500,000 or more in assets, an investment program based
on answers to a smattering of questions likely won’t work well, he
adds.
Surprisingly, however, the
Jefferson National study found that 52 percent of advisers who
currently deploy robo services say they use them most often for
clients with portfolios of more than $1 million; 20 percent say they
use them most often for clients with more than $10 million.
Another counterintuitive finding in the survey is that millennials
don’t dominate the client ranks of advisers who use robo services. A
total of 49 percent of financial advisers use robo services for baby
boomer clients, the same percentage as for
millennial clients. So how should RIAs incorporate robo advisers
into their practices? Companies such as robo adviser Jemstep provide
automated investment services that human advisers can use on behalf of
their clients. Advisers are allowed to present the services as their
own.
The automated services would
be particularly useful for less complex smaller accounts, which are
not cost-efficient for advisers to spend a lot of time on, says Tricia
Rothschild, head of global adviser solutions at Morningstar in
Chicago. “Investors themselves can do it through a client portal,” she
says. The program could include automatic portfolio rebalancing. “Then
the adviser can provide higher-touch service as warranted — behavioral
coaching, discussion of trade-offs and choices clients have as their
situations change,” she adds. Rothschild says robo services can help
with generational wealth transfer. And robo advisers can help RIAs
expand their business by opening the door to a new — often younger —
client who might feel more comfortable signing up for an app than
cold-calling a human financial planner.
One tricky issue for advisers
using automated services will be explaining their fees, Rothschild
says. If advisers charge only 40 basis points a year for accounts run
by robo advisers, they may have trouble explaining why their
full-service clients have to pay 100 basis points. “Advisers must make
clear to investors the distinctions between the models,” she says.
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