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It’s Time to Robo-Proof Your Business Model

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A growing number of businesses are starting to focus on robo-advisors, who provide a simple process to match personal goals to a low-cost portfolio. Whether you think they are good or bad, there’s probably little protection from their impact. In fact, wherever you sit in the financial service supply chain, a robo will probably be “visiting” you, your clients and prospects soon.

In this article we will be exploring the impact of robos on the advice industry. While there are a number of advisory firms and advisors who are confident their business will hold firm against the impending, well-funded marketing of robos, others are building their defenses.

Many advisory businesses understand that they must move their client engagement to higher levels of discovery and personalization than that of robos. They realise the need to take into account clients’ individual needs and circumstances and add other services that clients value and for which they will pay.

Some advisors have reacted by adding their own low-cost robo service options. These investment adjuncts to their main offerings are targeted at smaller clients who have less demanding investment needs. Of course, some argue that this is akin to inviting the “fox into the hen house.”

Yet other advisors see robos as doing nothing more than providing low-cost, mid-quality investment solutions that meet clients’ simpler investment needs. They have no intention of providing a similar service.

The options for advisors

So what are the best options for advisory businesses? There are any number of client propositions that a firm might adopt. Five service offerings are illustrated in the graphic below, each with varying levels of personalization and catering to individual needs.

Advisor Service Propositions. Source: FinaMetrica

Box 1: The red box in the left-hand corner represents “traditional” investment advising with an emphasis on “finding” investment performance, often provided with little proven portfolio competencies and usually with limited client discovery processes.

Box 2: The dark orange box just to the right of the red box represents planning businesses giving advice utilizing simple investor risk profiling. Advisors often use tests with less than 10 questions and then link scores to model portfolios. This service can be carried out by a robo who can do it quickly, and reasonably accurately, at lower investment cost for single goals.

Box 3: The mid-orange box represents life planning and model portfolio services. The advisory practice typically uses goals-based planning supplemented with cash flow and sometimes Monte Carlo testing.

Box 4: The light orange box represents advisory practices that provide goals-based planning, usually supplemented with cash flow and Monte Carlo testing. They build personalized portfolios for clients using proven methodologies aiming to outperform simple model portfolios usually after analysis of tax, inheritance and control issues.

Box 5: The green box represents multigenerational family offices offering highly personalized investment solutions taking into account the individual needs of members usually after detailed analysis of tax, inheritance and control issues.

Positioning and client understanding

Wherever your business is currently positioned, you are likely to face competition from others in your space, from businesses in other segments moving into your space and new players.

For example, businesses in Box 1 are the most vulnerable to robo competition as they offer less personalized client service. Advisors in this segment tend to be price takers. They are the most vulnerable to robo competition and the ones who will most likely benefit longer term from bringing robos into their business.

They need to improve their portfolio offerings and have greater client engagement and suitability processes than the simple 3- to 10-question investor profilers that most robos offer.  A typical robo makes a portfolio recommendation based on a scored algorithm built on as little as three necessarily simple characteristics. What’s your risk tolerance? What’s your capacity for loss? What’s your time horizon? Such a profiler takes no account of existing assets, tax, estate planning, social security impacts and risk tolerance differences for couples.

Nor do robos necessarily take into account investor anxieties when markets run or crash. Because they don’t have a detailed understanding of the investors’ goals, and have great difficulty framing investment experiences against investors’ goals, robos have been described as “fairweather advisors.”

Businesses that have already developed a simple process to discover financial needs and match those to portfolios, as in Box 2, are in direct competition with robos. To fight off robo competition, they need to move to Box 3, which in turn increases competition to the incumbents.

So planning businesses have to understand their positioning and pricing in comparison to others and how they can improve their situation. The aim in moving from the bottom left red to the top right green box is to build closer relationships with clients through superior personal service, more personalized portfolios and to differentiate what they do from robos.

At each level there is a greater likelihood of attracting and retaining wealthier clients with more complex needs and generating higher fees.

Robos aren’t going to go away. The technology constraints that limited their development are largely gone. The regulatory restrictions that limited their application are under review. Every business in the service supply chain needs to have a researched, costed position on their impact.


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