Envestnet’s Bergman: Robo-Advisors, Automation Critical for RIAs’ Success

Automation of some tasks allows human advisors to focus more on what they do best: sophisticated financial planning

Jud Bergman is chairman and CEO of Envestnet. Jud Bergman is chairman and CEO of Envestnet.

Though the term “robo-advisor” smacks of cyborgian fiction, the reality is a robo-advisor plus a human advisor equals better client outcomes.

That’s the salient message from Jud Bergman, chairman and CEO of Envestnet, a leading provider of integrated portfolio and practice management technology.

In an interview with ThinkAdvisor, Bergman said practices that have given short shrift to automation by snubbing integrated web-based, or cloud-based, digital technology will continue to see their growth lag compared to those that embrace such innovation.     

Indeed, meeting requirements of the DOL fiduciary rule will, for many advisors, mean changing commission-based accounts to fee-based, and state-of-the-art digital technology can help ease that burden.

Bergman, previously managing director of Nuveen Mutual Funds, framed the tech have’s and have-not’s in a scenario he calls “the digital divide.” Those who don’t cross over to the digital side will continue to see their practices grow slower than those who do cross over.

In tracking and studying client returns of thousands of advisors and millions of portfolios, Envestnet has sought to determine how better client outcomes are achieved. Automated systematic rebalancing has emerged high on the list.

Following are highlights from ThinkAdvisor’s recent interview with Bergman:

ThinkAdvisor: The DOL fiduciary rule will necessitate more paperwork for both FAs and clients. What can be done to make that job less painful?

Bergman: It’s easy to see how web-based, or cloud-based, practice-management technology can automate the process of, say, moving from a commission-based account to a fee-based account, which almost always requires repapering. Also, it can systematize small accounts that may not be worth spending a lot of time on by, for instance, systematically rebalancing and sending [an alert] to the advisor when the account is no longer on-plan.

TA: What are the biggest benefits, in broad strokes, that automation provides to FAs?

Bergman: It gets them out of the business of doing calculations, which they aren’t as good at compared with automated technology—and, it takes them a lot of time. So advisors are able to spend more time doing what they do really well: sophisticated financial planning, tax and estate planning; behavioral finance. We find that advisors who use fully integrated technology as opposed to [putting together] three or four disparate [software] applications grow their fee-based practices at twice the rate of advisors who don’t.

TA: How does that affect clients’ investment results?

Bergman: We studied advisors who used a systematic rebalancing program from 2007-2009. As stock portfolios took a hit [during the financial crisis], it was difficult psychologically for clients to trade out of bonds and into stocks, though that’s precisely what they should have done. Advisors that did that added an average of 1,500 basis points through the end of last year. Yet, [according to] the tracking we did, only a third or so [of FAs] utilized systematic rebalancing. Those advisors who have adopted rebalancing technology have delivered tangibly better outcomes to their clients.

TA: What are your thoughts about robo-advisors?

Bergman: Digital advice is table stakes for the successful advisor of the future. There’s a tendency to look at this in a very simplistic form: robos vs. advisors. But creative thinking is something computers [robos] cannot do. So whether you’re a millennial, a boomer or an X-er, there’s overwhelming evidence that, as your financial needs grow, you prefer to use not only digital technology but also an expert trusted advisor.

TA: Does that mean human advisors will have digital advisors in their offerings?

Bergman: Exactly correct.

TA: Some middle-aged and older FAs aren’t as eager, or even willing, to use digital technology as younger advisors are. Why is it important for advisors to overcome such reluctance?

Bergman: This is what we’ve [defined] as “the digital divide.” It’s somewhat generational and somewhat behavioral. Yes, millennials are far more embracing of web-based tools than are boomers as a group. But that’s changing very rapidly. Advisors who want to deliver their services in traditional non-web-based ways have a challenge: for example, a number of their clients would like the benefit of advice married to web-based technology, which makes interaction easier. Advisors who are willing to cross the digital divide are finding that they not only have much greater productivity but are able to deliver better outcomes to clients.

TA: What do you think of the term, “robo-advisor?”

Bergman: It’s kind of good because it has a cyborg sort of dimension. “Robo” caught on because it evokes exactly what it is: a fully automated process. [But] the better process is a digital advice piece that’s managed by an expert advisor.

TA: What about younger clients who say, “I don’t need a human advisor. I just want to invest with a robo.” Will they gradually realize that they need to work with a flesh-and-blood FA?

Bergman: It’s already happening. Millennials with substantial assets are far more likely to seek out an advisor than do it themselves. I expect that will continue to happen.

TA: What’s a major practice-management advantage to FAs who use web-based tech?

Bergman: All those updates and upgrades that need to be installed by the advisor who uses disparate software applications happen automatically with a cloud-based integrated system. First there was mainframe installed software; then desktop installed software. The state of the art now is an integrated web-based system.

TA: You’ve said that data aggregation is key to more effective financial plans. Please elaborate.

Bergman: Data aggregation is a warp-speed [ultra-high-speed] enhancement to onboarding, and it also improves accuracy. The traditional “shoe box” way of doing a financial plan can take weeks or months, with clients bringing in all their [paper] statements and so on. With data aggregation, the client gives permission to access [online] the balances in their accounts, and the process is completed in minutes. It’s far more accurate and provides ongoing real-time updates as changes occur in the client’s financial life.

TA: What if a client doesn’t want to have their financial information put online?

Bergman: This is another example of the digital divide. Those investors that don’t want the benefits of a dynamically updated financial plan have no choice but to use the traditional means; and they and their advisors will be on the other side of the digital divide.

TA: Do RIAs have significantly different technology needs from independent broker-dealer FAs?

Bergman: Yes. For example, the RIA typically has already made the transition to being a fee-only advisor. Many independent BD representatives are in the process of doing so. They still have brokerage accounts; they still have mutual funds. So they’ll have a DOL challenge [regarding] the assets that are in IRAs. Their use of technology is very different.

TA: What about dually registered, or hybrid, advisors?

Bergman: They may not be fee-only, but they’re fee-based and generally have more complex technology requirements because not only are they fiduciaries for almost all their business but they also have access to a fee-based platform for products in a client’s brokerage account. So, the more complicated the practice, the more complicated the technology requirements.

TA: What new technology will financial advisors use 10 or 20 years from now?

Bergman: That’s a long way in the future. When I started Envestnet, I thought that the transition from commission-based to fee-based would be made in seven or eight years. But [17] years later, there are still more commission-based assets out there than fee-based. Things take longer than you think.

TA: How far down the road can you look, then?

Bergman: Four or five years from now, all the good, productive advisors will be using integrated web-based technology. They’ll [realize] productivity dividends because they’ll be able to get out of their routine, non-value-added activities, such as client onboarding, aggregation, systematic rebalancing and performance measured against goals.

TA: What’s your final thought on the merits of high tech?

Bergman: Technology enables us to see common characteristics among practices and gain insights; such as, there’s a high correlation between those advisors who are delivering better outcomes to clients and those whose practices are growing faster.

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