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AUGUST 06, 2015
RIAs Harness Personal Touch and Tech to
Fight Robo-Advisers
As automated platforms gain share, financial advisers compete by
adapting new software to traditional hands-on services.
By Jess Delaney
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PHOTO CREDIT: SANA IMAGES |
Disrupted by technological innovations, entire industries, from
horse-drawn carriages to audiocassette tapes, have collapsed, a
process 20th century economist Joseph Schumpeter famously called
“creative destruction.” Now one breed of financial professional
wonders if it’s next to face extinction: the registered investment
adviser.
Recognizing that the wave of so-called
robo-advisers — automated investing platforms that use algorithms
to construct portfolios based on client goals and risk preferences —
is a threat to the profession, RIAs have tried to harness technology
to compete with these Silicon Valley–born service providers, as well
as with more traditional advisers. In addition to allowing them to
launch their own automated services, new software for portfolio
accounting and management, risk management and marketing can help
advisers broaden their reach, streamline their services and improve
the client experience.
No firm exemplifies this paradigm shift better than Charles Schwab
Corp. The San Francisco–based discount brokerage launched its own robo-adviser,
Schwab Intelligent Portfolios, in March and then opened the
platform up for customization by independent advisers through Schwab
Institutional Intelligent Portfolios in June.
“There was a fair amount of concern a year or two ago, when the
concept of the robo-adviser was first being thrown around, but that
has done a 180,” says Bernard Clark, executive vice president and head
of Schwab Advisor Services. “From our advisers, we’re seeing an awful
lot of embracing of this concept.”
Between April and December of last year, assets under management of
the top 11 robo-advisers swelled some 65 percent, to $19 billion,
according to a report by Manhattan-based financial research firm
Corporate Insight. This growth doesn’t appear to be slowing.
Chicago-based consultancy A.T. Kearney predicts that robo-advisers
will break the $2 trillion mark in five years.
With Schwab Intelligent Portfolios, retail investors log on through a
computer or mobile device and receive recommendations for investing in
54 different exchange-traded funds across 27 asset classes based on
their stated goals, risk tolerance and time horizon. Institutional
Intelligent Portfolios, on the other hand, provides a platform by
which advisers can choose from more than 450 ETFs to construct their
own set of portfolios; clients can then interact with those portfolios
digitally.
Although technology will change how advisers work with investors,
Clark insists that RIAs can preserve the personal connection with
clients that differentiates them from automated investment services.
“Now the adviser crafts a relationship around the electronic
offering,” he explains. “They’ll probably want to have periodic
meetings, but they don’t have to be in person.” Crafting a portfolio
may be a large part of the relationship, Clark adds, but it’s more
effective with the estate planning and life coaching that only a human
adviser can provide.
Aaron Klein, chief executive and co-founder of risk software developer
Riskalyze, agrees with Clark on the importance of the human
relationship. “One of the biggest problems with investing is that we
sabotage ourselves,” says Klein, who emphasizes the adviser’s role as
a behavioral coach, protecting clients from making rash decisions in
bull and bear markets.
Founded in 2011, Riskalyze created a questionnaire that produces what
it calls a Risk Number on a scale of 1 to 99 that corresponds to the
level of downside risk a person will tolerate over a six-month period.
“Some people say it’s the ‘sleep number’ of risk,” Klein jokes. After
administering the test, advisers can then use the Auburn,
California–based company’s platform to calculate risk numbers for a
set of portfolios, which they can rank according to results of their
client’s questionnaire. Riskalyze’s 10,000 users manage more than $90
billion on the company’s platform.
In Klein’s view, risk-centric technology strengthens relationships
between RIAs and their clients by reducing the fear that the adviser
is making risky bets in hopes that big payouts will garner more
business. “When you stop touting returns and start focusing on risk
and how you design portfolios for your client, that builds a huge
amount of trust,” he insists.
Building trust in the digital age requires the ability to tailor
services to individual clients on a larger scale, says Eric Clarke,
CEO and founder of Orion Advisor Services, a portfolio accounting
software provider. “The most important aspect of technology for RIAs
is mass customization,” says Clarke, whose software is used by
advisers managing a total of $225 billion in assets. Orion builds
mobile apps and web portals, in which it integrates the RIA firms’
existing financial planning systems. The Omaha, Nebraska–based company
also builds in document-sharing and storage features and data
aggregation capabilities.
Orion helps advisers tackle the mass customization problem by giving
them tools to create personalized digital video statements. RIAs
record a generic video, and then information from the client’s account
is displayed on a screen at different intervals. To further
personalize the experience, Orion will integrate instant-messaging
services and video-calling capabilities into clients’ web sites to
help advisers build relationships with their customers and improve
users’ experience.
“Firms that aren’t focused on improving client experience are going to
struggle,” Clarke predicts. He sees the industry being shaped not by
the robo-advisers or other technologies but by demand for easier, more
convenient access to investment advice. Automated advisers have
excelled in this area by allowing users to sign up easily online and
log in any time to access their portfolios. “The other thing I think
robos have done a great job at is advertising online,” Clarke adds. “I
think advisers should be looking at social media platforms and
figuring out different niches that they can focus in on to bring more
prospects to their web site.”
As RIAs and robo-advisers broaden their reach by rolling out new
electronic offerings, online and social media marketing and related
technologies become all the more important. To address this need,
marketing and design firms like Blu Giant have sprung up to serve the
investment advisory industry. “The robos that are going to grow and be
a threat are the ones that drive traffic to their web site,” says Blu
Giant’s CEO, Brett Clarke, citing Schwab Intelligent Portfolios as a
fast-growing service spurred by effective advertising. “So, the
biggest thing for these robos and for advisers alike is to drive
traffic to their web site.” He points to ad campaigns targeting
specific demographics, social media marketing and landing pages that
simplify the sign-up process as key elements of a successful strategy.
“If advisers can do that, there’s no reason they shouldn’t be able to
grow right alongside the robo,” Clarke says.
Established in 2012, the Omaha-based agency works with advisers to
craft a brand identity to build a web site around. “If you’re going to
continue to exist as an adviser, you’ve got to be able to tell me what
you bring to the equation,” says Blu Giant’s creative director,
Christopher Norton. “What are you giving me that the technology by
itself can’t?” To answer this question, Blu Giant attempts to weave a
unique story around each adviser’s approach and personality by
developing customized videos, animations and interactive components
for client sites.
With new technological developments allowing advisers to reach and
build personal relationships with a wider customer base, Riskalyze’s
Klein doesn’t think RIA firms should focus on trying to imitate robo-advisers.
Instead, he argues they should leverage technology to showcase their
unique skills and allow them more time to focus on aspects of the
industry that are not easily automated. “In the race to depersonalize
your services, the guys with venture capital funding will win,” warns
Klein.
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