Reckoning with robo-advisors

Those in the latter category tend to charge more for their services—in the range of 55 to 65 basis points, perhaps double the going rate for fully automated portfolio management, according to Waymire. Robos are also distinguished by their dependence on digital tools to drive prospecting and sales, he adds. “Automated RIAs by and large don’t have sales departments. They have customer service and investment departments, but they don’t have a sales department because they use their websites and the Internet to do the selling.”

If you can’t beat them…

Millennials aren’t the only ones demanding more online investment tools, whether from robos or traditional advisors. Nash writes in his blog post, “We now believe almost every investor will be using some form of automated investment service in the next 5-10 years.”

Advisors who want a means to keep current clients from shifting assets to robo firms, or who want to make new inroads with the aforementioned types of clients, would be wise to consider offering robo-type online tools, Cufr asserts. “Ignoring [the robo movement] or being afraid of it is silly. Instead, it’s important to ask, ‘How does this fit into our value proposition?’”

OFAs such as Wealthfront are aiming squarely at the millennial generation, the 90 million Americans born between 1981 and 2000 who, according to Nash, collectively are projected to control some $7 trillion in liquid assets in less than five years.

One way for flesh-and-blood advisors to capture a share of that massive market is by aligning with a robo platform. Robo firms like Betterment, along with incumbents like TD Ameritrade, Fidelity, and soon, Schwab, offer “white label” automated investment management tools such as auto-rebalancing and tax loss harvesting for RIAs and other kinds of advisors to use with their clients, Cufr notes. As an advisor, having access to automated investment management tools provides a means not only to empower the digitally inclined and do-it-yourselfers among an existing client base, it can also open doors to serve younger investors—and investors of all ages, for that matter—whose smaller portfolios might not otherwise meet a firm’s minimum threshold of assets. “One of the uniform problems for many accomplished, high-AUM advisors is what to do with smaller accounts,” notes Waymire. “From the advisor’s point of view, turning to the OFA may be a very effective strategy for handling those accounts.”

Not only does that free them to focus on servicing existing higher-asset clients and prospecting for new ones, adds Cufr, “it gives the advisor an option where they might otherwise turn folks away. It’s an opportunity to marry the younger client’s money now, and to build relationships for the future.”

Meeting the robo challenge

Robos have clear limitations, Waymire’s firm, Paladin, concludes: “OFAs are not  viable alternatives for investors with larger asset amounts who require more comprehensive, complex solutions.”

But those limitations are no reason for flesh-and-blood advisors and their brick-and-mortar firms to grow complacent, particularly in light of the very real possibility that they may lose business and miss opportunities to tap new markets unless they rise to the robo-challenge by clearly demonstrating their own unique value proposition, giving clients good reason to maintain a face-to-face relationship with a local, real-life advisor. “You need to figure out where you add value that’s commensurate to the fees you charge,” explains Cufr.

Advisors “have to get good at justifying the fees they charge,” echoes Waymire, “because if you’re charging 280 basis points compared to a robo’s 40, you better have a really good explanation for what you’re recommending and why.”

Often, the key differentiator is the advisor or firm’s ability to provide a multi-dimensional, integrated plan, of which investment management is merely one part, and to work face-to-face with clients to develop, implement and update that plan. Having expertise in areas such as retirement, life insurance and long-term care planning, as well as business succession, tax and estate planning, is what will continue to separate flesh-and-blood advisors and firms from robos.

The heart of the value proposition for flesh-and-blood advisors is the ability to be a trusted resource to clients, not only in the various areas of planning, but as a source of objective information and advice, delivered with a personal touch, says Cufr. Indeed, more personal touches, be it face-to-face or via social media, email, or the telephone, “is one natural and important competitive response” to the rise of robo advisors, Puritz adds.

Another response is to lower fees and offer clients more low-cost, low-maintenance passively managed investment options, he says. “The days of saddling investors with high fees and offering conflicted advice are over.”

ETFs, index funds and other passive vehicles are gaining appeal anyway, he notes. “There’s a growing body of evidence that active management is sub-optimal,” which is prompting “an increasing acceptance of portfolio indexing” to manage investments.

“The whole premise behind higher fees is that active management will outperform the market,” adds Waymire. “But the evidence suggests that is no longer the case.” His recommendation to local advisors: “Adopt the OFA approach by offering more passively managed investments” and differentiate yourself by offering clients strategies that blend passive and active investments.

Advisors would also be wise to take a cue from robos by providing clients with access to more online information and tools, he says. “The more astute RIAs are looking to add to the face-to-face advice they provide by adapting their business practices to be more transparent and to look more like the robo model.”

That’s how to turn what is widely perceived as a threat into a genuine opportunity to grow.