The rise of the machines isn’t coming, it is here, and advisors need to understand how to leverage this technology so they can focus on what they do best: finding new clients and providing customized advice to existing core clients, agreed all three experts on the Robo Advice: Evolution, Not Revolution panel at the 2015 Morningstar Investment Conference on June 25.
In his opening comments, moderator Nicholas VanDerSchie of Morningstar reported there at least 37 different automated advice providers (robo-advisors) in the market, ranging from direct-to-client front ends to automated account solutions to robo platforms for advisors. But despite the proliferation of this technology, on the defined contribution side, assets under management so far account for only 2.5% of all retirement assets, and a fraction of 1% on the non-DC side, he noted.
“So we’re talking billions, not trillions” of dollars in AUM, he said on the amount robo-advisors now handle, with many of these catering to the “next generation of investors.” The average account balance is $25,000 to $35,000, though he said Baby Boomers are using the technology as well. Core to this interest are the low fees, on average 50 basis points, as opposed to 100 bps that is the industry standard for managing assets, he said.
Although “robo advice” might strike fear into the hearts of some advisors, it’s just part of an ongoing trend, said Tricia Rothschild, CFA, head of global advisor solutions for Morningstar.
“The trends we’re seeing that we all need to respond to is an increasing democratization of investing,” she said. “The power is shifting more to the individual. Think about 30 years ago, power shifted from Wall Street to Main Street with the rise of mutual funds and all of a sudden people who weren’t super affluent had access through their advisors to strategies” that were never before available to them. That trend continued, she argued, with the ability of investors to invest passively through ETFs. Today, it’s the robo advisor. “Ultimately to get people to take control of their finances and invest long term is a great trend,” she said.
David Lyon, CEO of Oranj, a front office app for advisors, noted this technology shift largely has been driven by the client. He said a few years ago his firm, Main Street Financial, took stock of what its clients wanted. “They were managing life online, from purchasing to banking to Uber. So we really wanted to provide them that experience and show them how to stay connected to their financial lives,” he said. Two years ago the firm licensed out its technology.
But the technology has to be good and meet client expectations, said Kyle Ryan, executive VP of advisory services for financial and technology company Personal Capital. “Our growth story is we focused on the user experience,” he said. “How do you provide the customer a good digital experience?”
Technology as Friend, Not Foe
All panelists stressed that robo technology can help the advisor better manage his business. Lyon noted that the “greatest opportunity for advisors is business development, but it’s been reported that you’re spending less time on business development and instead doing administrative tasks.”
Ryan cited a McKinsey study that said “virtual advice is a huge trend … because people want it” and for advisors it makes a more scalable business possible. He added that technology just makes it more convenient for advisors to tap into customers. “Some people want to meet face to face, but a lot of them just want to jump on an Ipad.” He noted this gives advisors time to concentrate on gathering new customers.
For example, his firm’s virtual environment, especially with screen sharing and videoconferencing, offers greater efficiency to advisors working with clients. Those who use Personal Capital bring on an average of 12 new clients a month, Ryan reported. “It allows them to focus on business development and relationship management,” he said.
Rothschild concurred, stating that technology can make an advisor more efficient. She cited one advisor describing the new model for an advisor as a pie divided into three pieces: a third of clients use the technology alone; a third helps advisors in writing a client plan, and the final third allows the advisor to focus on providing clients with more complex strategies.
For that advisor, the technology “just took out two-thirds of his time and outsourced it to the investor or the technology, while bringing fees down, maybe 20%, to deliver the right value. That’s a pretty good proposition for you as a business owner and leads to better outcomes.”
All panelists agreed there will be a shakeout of those 37-plus technology providers, although there will be continued growth in robo advising. Lyon stated projections of $2 trillion in assets moving to robo advisors in the next five years. However, Lyon is convinced the technology will help advisors in the long run, allowing them to focus on the biggest impact they can make on their business: providing the greatest alpha in a portfolio.