From the May 2014 issue of Investment Advisor • Subscribe!

Out-of-the-Blue Competition

One drawback to independence is meeting new competitive challenges

Robo-advisors have been looked at as everything from a minor disruptor to a major threat, but can you learn something from them? Robo-advisors have been looked at as everything from a minor disruptor to a major threat, but can you learn something from them?

Whenever anyone asks me who the readers are of Investment Advisor, I’ve always responded that you are “independent and independent-minded advisors.” Independence is a wonderful thing, not just for the advisor but for the advisor's clients as well, I’d argue, since by definition it doesn't presuppose that proprietary products or a “one-size-fits-all” approach to investing or client service is the best path to follow.

Independence does have its drawbacks, however. You’re responsible not just for yourself and your clients, but for your partners and employees (assuming you have those), for marketing yourself, for making strategic and tactical plans and finally for planning your exit or succession plan. Yes, you have a broker-dealer or a custodian or you use a practice management or business coach, but the buck still stops with you. And one of the things you have to worry about is the competition.

What's that, you say? You’ve got a very strong presence in your local community? Your clients refer others to you? You’ve got a column in the local newspaper and sponsor two Little League teams?

Well done. I would suggest, however, that your competition is no longer circumnavigated by your SMSA or your local business development council. (It's also been my personal experience that the larger a firm is, the more time it spends on internal matters and avoids competitive issues. But I digress.)

In the many interviews I conducted for this month's cover story—the 12th annual IA 25 list of the most influential people in and around the advisory business—the subject of robo-advisors, or the new generation of online advice providers, came up unbidden so often that I began to bring it up on purpose.

Perhaps you expected the response to be one of studied skepticism. “Yes, they have some good technology, but our clients are high-net-worth people who value too highly our relationship to fall prey to such a limited, impersonal offering.” Well, nobody said that in my IA 25 interviews. Instead, I heard Skip Schweiss of TD Ameritrade talk about a TD advisor's advisory council in which one of those “robo-advisors” conducted a demo. Schweiss said he watched as one advisor—and remember, these RIAs on TD's advisory council tend to be the more successful, larger firms—was blown away by the demo. “His eyes went as wide as saucers and his jaw dropped,” Schweiss reported of the advisor who witnessed the sophistication of this online advice platform. Schweiss has decided to take the money from one of his own accounts and try out one of those platforms himself; he said it took him 10 minutes to set up the online account.

Danielle Andrus, IA's executive managing editor, reported in mid-April that Corporate Insight “analyzed 11 online investment advice providers and found that combined they have more than $11.5 billion under management or advisement.” Most of those providers only started operations within the last two years, by the way.

My point is not to frighten you, but to encourage you to think about what you offer your clients that's special. Think about how you could serve younger clients, especially the children or relatives of your current affluent or HNW clients. Can you use some of these technology tools that the robo-advisors have rolled out to serve those lower-net-worth clients profitably, while building up a roster of clients for the future, and perhaps using younger advisors to do so? Will your technology partners or broker-dealers or custodians help provide you with that technology (it would be to their benefit as well, of course)?

I’m just saying you should think about it. Many of the very smart people on the IA 25 have already done so.

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