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Technology > Investment Platforms > Robo-Advisors

3 Reasons Robo-Advisors Are Taking Off

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Robo-advisors have proliferated, but why? In a session on Wednesday at Schwab Impact in Denver, Bill Doyle of Forrester Research gave three reasons: industry conditions favor innovators, the technology works and, most importantly, clients want it.

Reason 1: Conditions Are Favorable

“Regulators favor upstarts,” Doyle said. They like the robo-advisors because the business of providing advice electronically leaves an electronic trail, he said. Furthermore, when advice comes via an algorithm, it’s “consistent and objective.”

ETFs make constructing inexpensive portfolios easier, too. “Some literature says passive is more stable” and ETFs are superior over the long term, Doyle said.

(Schwab’s robo-advice offering, the coming Schwab Intelligent Portfolios, uses all ETFs in its portfolios. See Schwab’s Bettinger, Clark: RIAs Must Evolve; Robos in ‘Top of the First’.)

Reason 2: The ‘Technology Finally Works’

The cloud is cheaper than a mainframe, and APIs help businesses work together seamlessly. Doyle used Wealthfront as an example. The wealth manager uses Bloomberg to supply it with market data, Apex for clearing and Vanguard for ETFs. In two and a half years, Wealthfront reached $1 billion in assets under management, more than twice as fast as Charles Schwab, Doyle said.

Robo-advisors can operate much more cheaply, too. The average annual fees for actively managed mutual funds are 1.5%, according to Forrester, compared with robo-advisors like Wealthfront’s 0.25%.

Depending on which robo-advisor a client chooses, they may be getting more human involvement for their lower fees. Rebalance IRA and AssetBuilder have their low fees (0.5% and 0.45%, respectively), but also provide more “hand holding” than Wealthfront, according to Doyle.

Reason 3: Clients Want It

Forrester research found in 2012 that more frequent advisor interactions drove revenues. However, digital interactions correlated more strongly to revenue. Social network interactions had the strongest connection, followed by online chatting and texting, email and the advisor’s website.

U.S. adults spend more time online than they do watching TV, Doyle pointed out. Clients get their news and do their shopping online, he said. As Neesha Hathi mentioned in her session on RIAs and technology (Schwab’s Hathi: What Clients Expect Now), about a third of marriages start online. If they’re using the Internet for something as important as choosing their life partner, why wouldn’t they use it for financial advice?

Clients prefer three-to-one to buy or sell stock, he said, and the same ratio prefers online over paper for account data.

“This is just the right channel for that stuff,” Doyle said.

Furthermore, Doyle pointed out that clients feel online advice is just as good as what they can get from a traditional advisor. A survey by North American Technographics found that in 2010, 22% of investors agreed with that statement; in 2014, that increased to 44%.

Financial planning is an “untapped part of the digital disruption,” though, Doyle said. Robo-advisors provide account aggregation and investment management, but “no one’s cracked the code” on the financial planning portion.

“It’s probably already occurred to you but I want to state for the record that most investors want to deal with a human being,” he said.

In addition to driving fees down and increasing client expectations, robo-advisors will make it difficult to add new business because prospects will already have been “grabbed by disruptors,” Doyle said. However, the North American Technographics study found 56% of investors want to research investments on their own and incorporate their work with advice from a professional. By comparison, just 24% want to do all of their investing on their own.

— Check out Don’t Fear the Robos, Advisors Can’t Be ‘Bot-Sourced’ on ThinkAdvisor.


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