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?”