Robo-advisors ignore retirement planning

Trendy finance technology is more investment-oriented than focused on preparing clients for life after work.

The current robo-advisor market targets younger, smaller investors, according to one retirement-industry observer at this week's LIMRA conference in Boston. The current robo-advisor market targets younger, smaller investors, according to one retirement-industry observer at this week's LIMRA conference in Boston.

The robo-advisor trend generates a lot of attention. But in reality, the advisor market remains hesitant, and deployments may be lower than the hype suggests.

Howard Schneider, president of the research and consulting firm Practical Perspectives, outlined these and other trends related to robo-advisors during a session at LIMRA’s Retirement Industry Conference in Boston this week.

Schneider said the current robo-advisor market is primarily focused on accumulation and is targeted mainly at younger and smaller investors. The technology also tends to be more investment-oriented rather than planning-focused, and is not adept at considering specific needs during retirement including health care costs, estate planning and intergenerational issues.

He added that the four primary robo-advisor models in the marketplace today include:

  • Direct to consumer;
  • Offerings that leverage advisors;
  • Defined contribution plan advisors, and;
  • Wholesale models.

Within all models, brands that are well established in other product or service categories tend to have higher adoption for their robo-advisor offerings.

The technology so far is not targeting retirement-income planning due to the complexities involved with creating algorithms that can adequately support unique customer needs and customization for multiple goals. Risk management, the emotional aspects of retirement and the great unknowable question of how long one might expect to live also add to the difficulty of addressing retirement income planning with robo-advisors, said Schneider.

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Today’s robo-advisors tend to be more educational and rarely integrate with key retirement planning elements like Social Security and pensions, he said.

As a result, many advisors are taking a wait-and-see approach, although RIAs are somewhat ahead of the curve in terms of adoption, said Schneider. Demand from clients and prospects remains uncertain, and most advisors expect they will continue to play a role in supporting clients who access robo advice.

Research conducted by Practical Perspectives found offering robo-advice is not a priority during the next two years for most advisors. Nearly half of advisors and RIAs and more than 65 percent of full-service firms indicated the technology is not a priority at all during the next 12-24 months.

Key challenges standing in the way of robo-advisor deployment include uncertain market demand; the inability to tailor the technology to individual businesses; compliance and regulatory questions, including whether robo-advisors will be subject to new fiduciary standards; insufficient capabilities; and whether they can add to profitability.

Despite this apparently reserved attitude toward robo-advisors, the technology does have significant interest as a five-year (or more) opportunity, said Schneider. Some advisors are interested in robo-advisors as a way of adding technology to their offerings, reducing paper consumption, assisting with client-building and facilitating automated billing.

Conor McGuinness, director of policy and compliance at Nyhart Actuary and Employee Benefits, noted most robo-advisors on the market today do not take specific retirement risks into account within their algorithms. The company has developed a robo-advisor product, now in the beta phase, that focuses on the decumulation side of retirement planning and applies actuarial principles to the process to provide a more holistic retirement planning approach. The product estimates retirement income and expected expenditures and introduces variables such as retirement age, charitable giving plans and vacation desires as well as risks, such as longevity, health care costs and long-term care needs.

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3 things top-performing RIA firms do

How social media helped one RIA significantly grow its business

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