As so-called “robo-advisors” continue to grow, offering their services to more and more consumers at a modest 0.15% to 0.35% cost, the question arises whether such services will ultimately be a threat to traditional advisors. Can human advisors survive in a world where robo-advisors commoditize the cost of passive strategic portfolio construction down to almost nothing? What can today’s advisors do to fend off the threat?
A closer look at the robo-advisors, though, reveals that many of the tools and strategies they implement are not actually unique, and can be implemented effectively by human advisors as well. For instance, advisors that utilize model portfolios and implement with “intelligent” rebalancing software can already offer most of the continuous-monitoring automated rebalancing and tax loss harvesting offer by robo-advisors today. Human advisors can also go beyond just offering investments, providing a wider array of personal financial planning services, and augmenting the relationship with technology tools from account aggregation and financial dashboards to online collaborative financial planning software and “meeting” with clients via tools like Skype and GoToMeeting that allow them to maintain relationships in a highly efficient manner.
As advisors evolve, the landscape of the future may look less like robo-advisors threatening human advisors directly, and more like robo-advisors commoditizing certain parts of what today’s advisors deliver, forcing traditional advisors to adapt and either get far more efficient (“do as they do”), or move up the value chain with financial planning advice and deeper relationships, or all of the above. That will allow traditional advisors to continue to keep their costs aligned to the value they actually deliver.
While this transition isn’t impossible—in fact, it’s similar to the one advisors have gone through as they moved away from being paid for stock implementation with the rise of online discount brokerages—advisors who continue to lag in the implementation of technology or add little beyond the raw implementation of a passive strategic rebalanced portfolio may find it increasingly difficult to grow and compete at a reasonable price.
However, those who adopt the tools, technology and techniques of the robo-advisors,- and then build on top of it with financial planning services and technology-augmented relationships, will find themselves best positioned to continue to survive and thrive.
Do As They Do (Systematize And Automate Portfolio Implementation)
The “true” robo-advisors like Wealthfront, Betterment and FutureAdvisor offer well-diversified passive strategic portfolios, generally monitored continuously for rebalancing and tax-loss harvesting opportunities, for a mere 15 to 35 basis points, in a world where the ‘typical’ advisor charges nearly 1% on assets under management.
While this cost structure might imply a very simple, unsophisticated portfolio that has little cost and delivers little value, in practice the efforts to manage investment costs, match optimal asset allocations to goals and risk tolerance, automate rebalancing and implement various forms of tax-sensitive strategies quickly adds up to significant potential value. The chart below shows the primary “value-adds” (in percentages, and the additional dollar amount that would be accumulated from a $100,000 starting position over the span of 20 years) that Wealthfront communicates as a part of its marketing.
Yet the reality is that these benefits the robo-advisors offer are not necessarily unique to the robo-advisors; in reality, any advisor can create a systematized investment process that offers a series of model portfolios to clients, and then monitor those portfolios on a continuous basis using software to take advantage of opportunities. In fact, the key areas in which robo-advisors leverage technology—automatic rebalancing, proactive tax-loss harvesting, and asset-locating investments on a tax-aware basis— have already been available to and implemented by advisors in the form of “intelligent” rebalancing software for a nearly decade now!
Of course, recent industry surveys suggest that the majority of advisors still do not use rebalancing software; nonetheless, the point remains that advisors actually already have the tools necessary to do virtually everything the robo-advisors offer, and can do for their clients just as the robo-advisors do now. Except, of course, that human advisors are not limited to their investment offering, and have the potential to offer far more.
Move Beyond Just Passive Portfolio Construction
As discussed previously on this blog, one of the powerful effects that is occurring as a result of evolving technology and the growth of robo-advisors is the steady commoditization of a well-diversified passive strategic portfolio (and investment management more generally). Simply put, if the sole value propositions you as an advisor provide to clients for a 1% fee are portfolio construction, diversification, and continuous monitoring with appropriate tax-sensitive rebalancing, your business may well be in danger for being overpriced.
Yet in practice, many (though certainly not all) financial advisors have long since been evolving their value proposition beyond “just” the essentials of portfolio construction. The entire growth of comprehensive personal financial planning services represents the clearest example of this trend—with the number of CFP certificants in the U.S> having more than doubled in the past 15 years to nearly 70,000—as advisors seek to differentiate themselves beyond just portfolio construction alone.
Notably, though, most of the “robo-advisors” are still remarkably investment-centric in their offerings, and are not necessarily focused at all on the “other” aspects of a client’s financial world. That’s not necessarily a knock against the robo-advisors, but simply an acknowledgement that passive strategic portfolio construction is conducive to systematic implementation with algorithm-based technology, while good financial planning goes beyond a technology solution and generally requires a more human touch, due both to the complexity of the information and the the social accountability that helps to address the challenge of getting another human being to actually change their behavior.
In other words, simply put, financial planning is the anti-commoditizer, and therefore for the foreseeable future is the anti-robo-advisor value-add as well. And the differentiator is likely to remain in place for a long time to come, because changing financial behavior requires more than just an efficient technology tool to deliver information.