Robo-advisors have almost $16 billion in assets under advisement, according to Corporate Insight, and directly manage almost $4 billion. Furthermore, they’ve earned those assets in only a few years of providing online advice.
There are limitations to using an online advice provider, though, according to Equity Institutional. The firm recently released a white paper addressing those limitations.
For advisors anxious about that rapid growth and seemingly stiff competition, there are some ways you can position your firm to take advantage of robo-advisors’ boom in assets when investors outgrow the simple advice they provide and begin looking for something more sophisticated.
“When you’re talking about dealing with a robo-advisor, you can put in all your information and you can have your investments directed, but our advisors are telling us one of the things you can’t do is you can’t ask the why,” Jeff Kelley, senior vice president and chief operating officer for EI, told ThinkAdvisor on Friday. “You can’t go through discussions with your advisor as to what the rationale behind the decision making is and talk through the various situations in your life.”
In the white paper, EI suggested six ways advisors can position their firms to be prepared to inherit assets from investors leaving their robo-advisor.
1. Provide access to alternative investments. Robo-advisors rely heavily on ETFs and indexed investing to provide automated services to clients. In addition to their hands-on expertise, traditional advisors also provide clients with “expanded asset classes that you really need an advisor to work your way into,” Kelley said. “Those advisors that continue to focus on the newer asset classes that are gaining favor, they will always keep the advisor in that market and prevent them from ever becoming extinct.”
One example of newer assets classes quickly gaining favor is in liquid alts, which have grown 40% since 2008, according to Deutsche Bank, and are expected to grow another 44% by September 2015.
2. Remind flighty clients that robo-advisors are still being tested. A robo-advisor can build a portfolio for a client, “but then it misses that next step of logical thinking that takes the data and makes a decision based on the discussions with the client as opposed to just taking static information and creating a model and passing it back to you.” When clients need more than just direction for their investments — like when volatility increases and they need help resisting the urge to bail out of the market — traditional advisors will be able to provide services that can’t be automated.