As we begin 2014, a number of issues loom that may have broad impact for advisors in the coming year. Perhaps most significant is the fact that we may finally see some activity on the regulatory front; the next fiduciary proposal from the Department of Labor is targeted for August 2014, and while the SEC may be taking a back seat on the fiduciary issue and waiting for the DOL to act, the regulator has committed itself to step up oversight (i.e., examinations) of investment advisors, and may even take up the recent SEC Advisory Panel's recommendation to begin levying user fees on RIAs to help fund increased oversight. On the other hand, the CFP Board may also face its own turmoil this way in its ability to oversee CFP certificants, as the challenging Camarda case plays out.
In the meantime, the slow-motion trainwreck that is the advisory industry's demographics problem will continue to play out. The latest Moss Adams study showed that employee advisors are now outnumbering owner-advisors, yet the number of advisors available to hire who have capacity for new clients continues to dwindle. While the anticipated mass exodus of retiring advisors has been more like a trickle so far, for a number of reasons, the veteran advisors who remain still cannot solve the capacity of growing firms that need to hire younger advisors to take the lead. In the coming year, the problem is going to become a lot more noticeable.
Meanwhile, the potential for a bear market will continue to loom in the coming year. Whether 2014 turns out to be the next stock bear market—or a rapid unfolding of the long-anticipated bond bear market—remains to be seen. But if 2014 is the next big one, expect the decline to ripple across the industry, as advisors who have rapidly grown their AUM businesses receive a stark reminder of the importance of profit margins to protect against the inevitable revenue declines that come from time to time. In fact, many advisory firms are now so large that they cannot simply grow their way through a bear market with new clients!
In the next two blogs in this series, we’ll address those issues. In this blog, we’ll go deeper into the continued rise of the "robo-advisor."
While the robo-advisors seem to have exploded onto the scene in 2013, the reality is that measured by actual numbers, most of them are still quite tiny, especially relative to the venture capital they raised. None appear to actually be economically viable or are even running at a breakeven pace yet, much less making the return-on-equity profits their funders expect.
In the coming year, we'll begin to see which robo-advisors will outpace the others and pull ahead, and many will aim to refine their models; some may even decide that it's more constructive to be a partner with advisors than a competitor, given the reality that most robo-advisors are actually more in competition with online brokerage tools like Schwab and E-Trade than human advisors. At the same time, it may be the heavily technology-enabled advisors, who I call the "cyborg advisors," who will really begin to shine, blending the best of technology and human skills that pulls ahead of both the robo-advisors and the humans.
Robots Vs. Cyborgs (Vs. Humans)
In retrospect, it seems like 2013 may have been the year of the robo-advisor, given how much attention they received in the industry and consumer media. From Betterment and Wealthfront to LearnVest and Personal Capital, the robo-advisors have made a big splash in the advisory world. The reality is that their actual businesses are still small; while Betterment and Wealthfront are each touting several hundred million dollars in AUM, at their billing rate of 0.25% or less this amounts to less than $1 million in revenue, which doesn't likely even cover the salaries of their dozens of computer engineers and other staff.
That means that while they're visible and perhaps gaining some traction, none of the robo-advisors are even at breakeven viability yet, much less profitable (and certainly not at the levels of return-on-equity that their venture capital funders likely expect). Moreover, none has had to even try to navigate a bear market with their ‘clients’ to find out whether the websites, apps and algorithms are sufficient to help investment clients "stay the course" in the midst of turbulent markets.
From a broader perspective, though, the reality is that many "robo-advisors" are really not online financial advisors at all; they're purely online investment-only tools, and do not provide comprehensive personal financial advice beyond the portfolio itself.
In fact, as online investment-only tools, most robo-advisors are more directly in competition with other brokerage firms with online tools for self-directed investors, from Schwab to E-Trade, than they are with advisors who provide a wide swath of other personal advice services to people who generally have chosen to delegate to advisors rather than do it themselves. In other words, robo-advisors may not really be competition to human advisors in the first place, because each provides substantively different services for a different type of clientele.
Nonetheless, the fact remains that while the robo-advisors may be too much computer and not enough human to help clients really change their behavior and avoid market panics, arguably many of today's advisors are "not enough robot" and grossly underutilize tools and technology that could make their financial lives easier for themselves and their clients. To some extent, this may be because of a dearth of venture capital and private equity being invested into solutions for advisors in key areas, but it's hard to deny that the industry has been slow to adopt new technology overall. That includes areas as diverse as social media, client financial dashboards, basic website design and overall adoption of the cloud.
Yet the potential for advisor benefits from technology is tremendous; a Fidelity study earlier this year showed that on average Gen X & Y advisors have more profitable practices than baby boomer advisors, and the key distinction was their heavier use of technology.
Accordingly, this suggests that the real winners in this battle may not be the "robo-advisors" or the humans, but instead the "cyborgs," those part human, part technology blends that seek to leverage the best of both worlds to provide the best solutions and experience for their clients.
In point of fact, this is actually the case already for both LearnVest and Personal Capital, which heavily leverage technology to have "virtual" relationships with clients, yet build entirely around individual human being advisors as the core of the relationship with clients. As advisors increasingly go to the cloud, this kind of offering becomes more and more feasible for the average advisor as well. In a world where advisors can easily have digital presences, communicate effectively using virtual tools and have effective collaboration tools with clients, the lines between "human" and "robot" may begin to blur.
In any event, if 2013 was the year that robo-advisors first really got noticed, 2014 will be the year they start to mature. We’ll begin to see which will take the lead and which will fall behind. Although it's unlikely that any of the robo-advisors will actually go out of business entirely until the next bear market comes along, expect to see this space heat up more in 2014, and for the robo-advisors to begin to further distinguish and refine their business models. Some may ramp up their competitiveness with advisors - Personal Capital is the most direct competitor for traditional advisors now - while others may decide that advisors are better partners than competitors, and that online investment tools can complement a human providing more holistic advice.
Here’s the bottom line. While it still remains to be seen which, if any, robo-advisor models will prove viable and all are still small, expect to see a lot more activity in this space in the coming year. Along with, perhaps, a few more new tools for advisors to become more "cyborg-like" and take the robo-advisors on head to head.
View all the blogs in this series of posts on the top three issues that will affect advisors in 2014.