I pay my bills online using my bank’s website, which usually works great. However, a couple of months ago, I put my gas bill in my “to be filed” folder rather than the “pay” folder, and realized my mistake only a few days before the payment was due. I went to the New Mexico Gas website to pay the bill directly, but was redirected to a private online pay service, which I used.
Last week, I got a disconnect notice from New Mexico Gas for failure to pay that bill. It seems the bill pay service (which I’m dying to name, but probably shouldn’t) has a limit on the amount of each payment to NMG, and my bill was over that limit (winters are cold up in the mountains of New Mexico). So they just didn’t pay it: no warning, no notice, nothing. The worst part was that it took me over two hours to contact a human who could explain to me what happened.
I’m not telling you this tale of online woe just to vent (OK, maybe a little). In today’s digital world, “online service” is largely an oxymoron (and I’m sure every one of you has your own stories to back that up). This is one big reason why I’m not nearly as panicked about the threat of robo-advisors as many other observers seem to be. The low-cost online advisory industry is a volume business based on efficiencies gained by using technology instead of people. The flaw in this business model is that when problems arise—which they inevitably do—customer service is required to sort them out.
That’s why in my view, in the not-very-long run, online investing technology will prove to be a huge advantage to the independent advisory industry. We’re already seeing the emergence of a number of robo-platforms that, rather than compete with financial advisors, are designed as independent advisory tools. I recently had a chance to chat with the man behind one such platform: Daniel Satchkov, president of RiXtrema, in New York.
RiXtrema’s Advisor BioniX was introduced in February to help independent advisors compete with robo-platforms and to better use technology to leverage existing advisors and staff, creating more financially efficient businesses. The basic idea is that when advisors and other client service folks can spend more time with clients, the better those clients will feel about their firm—and the bigger the perceived difference between human advisory firms and robos.
To do that, BioniX is designed as a branded client portal on the advisor’s website that “automates portfolio management and basic client interaction.” Advisors can use it as one part of their service to all their clients, or just for clients with less complex advisory needs (who might be targets for robos). It includes an account opening form, along with a financial planning questionnaire designed to identify each client’s needs, investing preferences and risk tolerance. BioniX allows advisors to plug in their approved funds and model portfolios, and it rebalances the portfolios according to the advisor’s specifications.
The really cool part of BioniX is that it allows clients to interface with their portfolios on their own. Clients can log on anytime to see how their portfolios are progressing, but the most valuable feature is a nifty tool called “Your Retirement Plan Parameters,” which enables clients to change factors such as their initial investment, savings rate, retirement age and withdrawals to better understand how their portfolios will work over time.
The problem that I’ve always had with risk tolerance questionnaires is that they look at risk as if it were the only factor in investing. From that perspective, the only rational answer to the question “How much risk do you want to take?” is “As little as necessary.” To really understand risk, investors need to see the relationship between risk and return so they can determine how much risk is necessary for them. Clients also need to see that the biggest risk to their retirement is their own behavior.
“Many robos don’t pay enough attention to all the risk elements in a portfolio,” said Satchkov. “The client needs to understand three basic relationships: the risk-reward trade-off; their savings rate versus their ending balance; and their cash withdrawal rate after retirement versus the ending balance.” Allowing clients to change their portfolio parameters and immediately see the long-term results is a very powerful way to convey that level of understanding.
Satchkov used his expertise in risk management (he was associate director of risk research at FactSet, where he developed risk software and published many academic papers on risk management) to create a very sophisticated “crash testing” module for Advisor BioniX to help advisors and their clients better understand their portfolio risk during major market events—and further differentiate his platform from other robos. It’s called “extreme impact risk measurement, which can be thought of as a quantification of exposures to particular extreme impacts, i.e., a model of a portfolio response conditional on an occurrence of some financial market scenario,” he wrote with Arcady Novosyolov of the Siberian Federal University in their paper on risk modeling.
Here’s how he described the problem with existing robo-risk management in an article titled “When Black Swans Meet Robo-Advisors”:
“Robo-advisor methodologies are based on mean-variance optimization, which focuses on trailing variance as a measure of risk. Trailing variance is calculated from relatively recent history of the financial markets, usually a few years. Variance in financial models is simply an average squared difference between the average return and return on every date observed over some historic period of time. Thus it should be clear that when [the] market is trending up like we have seen over the past few years, the average return is positive and deviations from that average are relatively small. That is why in periods of prolonged market tranquility, trailing risk measures have dramatically understated market risk.”
He concluded, “The current wave of robo-advisors has great management teams and, in all likelihood, they will eventually address these concerns. In the meantime, however, these points represent a huge opportunity for advisors who are prepared to add value by creating a thorough risk management plan for their clients’ wealth.”
The cost to advisors for BioniX is 10 basis points, leaving plenty of room to generate revenues and still offer smaller or less complex clients a substantial reduction in a firm’s standard fees. (Satchkov suggested a price tag of “maybe 50 bps.”)
He also pointed out that even clients with $300,000 or $400,000 in AUM “might not have much complexity in their portfolios.”
Platforms such as Advisor BioniX clearly offer a viable solution for the age-old advisory problem of what to do with smaller legacy clients, friends and family of larger clients, community centers of influence, etc. They offer a cost-effective way to attract Gen X and Y clients who are the target market of today’s robos. But it seems to me their potential goes far beyond that. A low-cost, high-tech client interface could dramatically increase the relatively low profit margins at many independent advisory firms.
“Our vision is that the client does as much as possible on their own online. That way, the advisor can focus on things where they add the most value. Of course, the advisor will need to have some phone time to open the account, provide advice, have regular client meetings, etc. Even so, Advisor BioniX enables advisors to handle many more clients,” Satchkov said.
Advisors and their staffs will still be available to provide a human touch to solve those pesky problems when they inevitably occur. Advisor BioniX and platforms like it are a big reason why I believe that online technology is a major leap forward in the evolution of independent financial advice, rather than its demise.