Scenario 1: You’re considering adding a robo-advisor platform to help your reps expand efficient service to smaller clients, but your reps are concerned they could lose clients of their own to the new offering. How do you manage client and rep expectations about robo services? What services are you using robo tools for?
Ralph DeVito, The Investment Center, Division II: We’ve had a number of inquiries from reps about robo. We’ve taken a deep look at it. With respect to how it’s going to affect the rep, I’m not quite sure exactly where this is going. Right now I feel that it has its place for this new millennial type person who thinks that they know everything and they want to do it all on their own.
We deal with higher-net-worth clients. The purpose of the rep is the important part here; the value that they have to the client. I don’t know how many they’re going to lose to robo. We’re going to probably set up a robo avenue so if they need to will be able to get that smaller client. I think if the client’s asking for it, use it.
We’re looking to private label an already existing platform, and we’re staying away from, at least initially, the ones that are all electronic, all run by algorithms. We’re looking to partner with a firm that actually has management behind it, because I think that that’s important.
I wish I had a crystal ball to tell us where it’s going to lead. It’s obviously getting very large for some of these firms. I’m concerned about how they’re going to do their due diligence and have suitability requirements for their clients. They seem to all have a very slim new account process. It seems too easy. It seems to be like more name, address, social and maybe income and what you think your risk tolerance is. I think this is yet to be tested in a down market. We’re cautiously putting our toe in the water with it.
But again, I still feel that it’s the rep’s relationship with the client and all those assets that is the bigger part, and this will be probably just a small portion of it for us at this point.
Jamie Green, Investment Advisor: Lon, you know technology pretty well. I think you’ve done some interesting things there.
Lon Dolber, American Portfolios, Division III: It’s a relationship business, but to me the robo-advisors [are] a technology tool that can be used. I don’t want to live in anybody else’s technology bucket, so we acquired an Envestnet-type company called Trustfort. It allows us to control the development. It allows us to make decisions about what we think the future’s going to be. If I want to go down the road of offering a robo type of scenario, I’ll be able to do that.
To me, to be independent you have to be technology independent.
David Stringer, Prospera Financial, Division I: While I agree with what everybody said, I think what we’re seeing here is the commoditization of modern portfolio theory. It’s now worth, basically, 25 basis points. To your point, it is a relationship business. Advisors, if that’s how they’re making their living, are doing a risk tolerance profile and putting it in a nice pie chart; we now know the value [of that] is 25 basis points.
It requires a higher level of service and value that you provide to your clients. We’re looking at robo-advisors, but we recognize that it is going to probably follow the same pattern as online trading and no-load mutual funds. It hasn’t been tested in a bear market yet. It’s got a lot of traction right now because we’re in a robust market.
Yet to be determined is how it plays its part. In my view, when advisors serve high-net-worth clients, they provide more than asset management. They provide liability management, insurance, the 13 wealth management services — there’s a higher level of planning that goes on than just entering an order or modern portfolio theory allocation of assets across a pie chart.
[Robo-advice] will probably be the lowest end of the service offering. This will probably be a solution for the DOL.
Eric Schwartz, Cambridge Investment Research, Division IV: Advisors ask me about this all the time, and I tell them, ‘Look, if you’re 55 or 60 and you’re going to retire in seven or eight years and you want to just ignore this, it’s probably fine. Maybe you lose 2% of your clients to it over the next seven years.’
I think if anybody’s looking forward 25 years or even 10 years, the clients are going to expect a service strategy that includes both considerably more technology than they are expecting today as well as the personal touch.
We have a committee called the New Century Council, which meets with Amy [Webber, Cambridge’s president], and has been for a number of years. They are all 45 and under. We have been working with them for a year and a half on a robo offering of what it is that they would want for their clients today and going forward. We have a program that we started developing a number of years back called Wealth Port, which is basically our overarching fee platform.
Fortunately, we started working on this several years ago. To some degree, that platform, with some variation, becomes our robo offering. It was already the entry point to this vast array of fee-based programs. Rep-managed, third-party managed, MAs, the whole nine yards.
What you’re now talking about is giving access to clients to be more involved in that process. Like anybody, we’ve always had client ability to look at those accounts any given day and see how they’re doing. To actually be interactive and helping in doing things on them, I think it’s going to be the standard.
Advisors and clients are not going to be, 25 years from now, looking at paper at the guy’s desk as their main way of relating to them. They may do some of that, depending on age and so on, but we’re finding even 60-year-olds are interested in robo-advisors or at least being much more technologically savvy.
I think there’s two ways of looking at it. One is that if somebody’s paying you 1% and has got $10 million in you, they’re still going to want some elements of a robo advisor. Then there are other people who want nothing but robo-advisors. We see every advisor has a choice of how to use the platform we’re creating; they could have no robo-advisor functionality, or that can be their primary business, or their junior advisor in their office could be focused on younger clients using that.
I see three price models. One is the existing price model called the one-percent, full financial planning, estate planning, whole package but with upgraded technology access for those that want it. Then you have your 25 basis point pricing, which would look similar to what people refer to as robo today. Then, you’re going to see some hybrid stuff there.
I think there is room for that, just like you’ve got your Walmart and you’ve got your Neiman Marcus. There are some niche players in the market that may focus on just one of those segments, but I think as you get to our size, you’re looking to offer all that. Even within one practice, there are advisors who will fall into those different categories.
Dolber: It’s not about the robo-advisor. It’s about the world at 25 basis points. For me, you can’t have other fingers in the pie. If the business is getting somewhat commoditized, the only way you can stop that on some level is to control your technology.
That means you have to be agnostic about the custody of assets. You have to be able to bill against any asset no matter where it’s held, you’ve got to be able to do it efficiently, and you’ve got to be able to go to third-party money managers and say, ‘I don’t need you to do the execution. I don’t care where the asset is held. I can do the billing. I can do the execution.’
DeVito: I think it’s going to morph, like Eric said. There’s going to be a place. There’s going to be that 25 basis point firm out there that’s going to probably survive, just like the deep discounters have survived, and the $7 trades.
We can’t ignore it. There’s going to be some place for it in our business. I don’t think any of us thought 20 years ago that we would do what we do on our phones today. I don’t want to underestimate the younger mentality and the way that they think and how they feel about doing stuff online.
Dolber: What happens when the public figures out that they don’t have to pay what they’re paying? Let’s think about this for a second.
DeVito: We’re going to have to build a worth into it. There’s going to be some value that we bring to the table with it.
Dolber: At some point, though, think of what’s happened. The first hit was against execution. Executions got commoditized. The next hit is against portfolio managers. They’re getting commoditized. ‘You don’t have to do the execution. I can do the execution. Just give me the moves. I’ll maintain the models.’
The next place is going to be the advisor. The advisor wraps 1% on top of a portfolio manager. The public is going to figure they do not need to pay 1.5%, 2% for these services.
Stringer: I would say […] the value shows up in a different way. If people are not doing financial planning for a fee, that’s a place. The value is probably fair where it is.
We now know what the value of a risk tolerance questionnaire with a pie chart looks like, but how do you get paid, as an advisor, for your advice and hand-holding? All the studies that we see are when you get into a bear market, the people who are do-it-yourselfers bail out because they’ve got an emotional override. They don’t have an advisor there to tell them to hold on. They have less performance. You may have lower fees, but you’re also getting worse performance for your portfolio management.
One of the things that keeps advisors in business is financial illiteracy among the general public. This is rocket science to them in a lot of cases.
What happens now is maybe you do a plan gratis, and then you charge an ongoing fee. Maybe now the model changes to, ‘Here’s what I’m going to charge you for your asset management, but for the advice, for coming up with your plan, I’m going to have to charge you a fee for that.’
Dolber: In some countries you’re not allowed to charge a fee against assets. You’re not even allowed to charge a commission. Everything’s retainer. You charge for what you do. I do asset management, I get $2,500 for that. I do accounting, I get $2,500 for that. I do financial planning, I get $2,000 for that.
Schwartz: The DOL, which I’m sure we’ll spend some time on later and other related regulation, is a growth business. If you want to make an investment, you invest in regulation.
I’ve been expecting fee compression for a number of years, and surprisingly, it hasn’t happened as much. I think the average in the industry is right around 1% today, and it was about 1.2% about 10 years ago or something. Not massive change. The DOL and others could sweep that away, depending on what they do.
A lot of how quickly some of this happens will be related to what regulation does. Certainly, in Australia, they didn’t voluntarily say that they were not going to charge any commissions and fees anymore. They just were swept away.
We’re going to see where that goes, but I do think that the key is advice. I agree that the value of managing money in a relatively simple asset allocation in ETFs or mutual funds is 20 to 35 basis points. If you’re charging 1%, the other two-thirds is for all the other advice you give.
Let’s face it, a lot of people have made a lot of money in the last 20 years in this industry. It’s been a good business, especially when it switched from heavily commissioned to fee-based, where you could have $100 million, $200 million, $500 million under management and have a steady, substantial flow and get pretty good margins on that versus every day you had to get out and find somebody to sell something to.
I think people could make a lot of money 10 years from now at 50 or 60 basis points for what they’re doing today at 100. I’m not saying they’re going to do it voluntarily, but if it’s forced on us by enhanced regulation, with the technology that’s available and the sheer size of the dollars out there, I believe that a pricing model that’s 50, 75 basis points would be very achievable versus the 100 now.
Dolber: That’s when I think you’ll see retainer business. It has to come down to where it’s about where a trail is. When you see it at 25, 30 basis points, that’s when the advisors will be more receptive to charging a flat fee or hourly fee. [Regulations] and economics will meet at some point. Then, you’ll get the adoption from the advisors.
Schwartz: We have an unusually high percentage of CFPs. Last time I looked, it was about 30% of our advisors. Those people are a little more of the mindset toward, ‘Yes, I’m going to charge 1% or 90 basis points or whatever, but I’m also going to charge first time out $2,000 and then every year thereafter $750 to do this basic work.’
That model’s out there. Quite honestly, it hasn’t been as lucrative as assets under management. Psychologically, most people don’t like their lawyer very much, in part because every time they call them up to ask them can they Xerox something, they get a bill for $90 or $5,000.
Regulation can do anything, but I think in this country, in general, there are still enough entrepreneurialism and pro-business groups that we won’t go to that extreme really fast. DOL could be good, bad or ugly, but I don’t think it’s going to that extreme.
Robos and Recruiting
Green: We talked about how financial illiteracy plays right into advisors’ hands and about the business side of what might happen to revenue with a different charging scheme. What about in recruiting?
The prospects that you’re trying to recruit, are they asking about, ‘What kind of platform am I going to be working on technology-wise, and will I be able to serve the children of my clients with some kind of very low-cost and very highly automated advice?’ Do you hear that at all?
DeVito: On the recruiting point, we hear everything. They want the technology. They want a low cost, high payout. They want to hear that you have a robo solution, just like they want to hear that you have a succession solution. You need to have all those pieces to make them happy. You need to provide.
Years ago it was account consolidation. Everybody screamed for it. In general, not too many people actually were using it. Now, it’s becoming more and more mainstream, even for us. Almost everybody’s using the Albridge solution. You have to have it. They’re asking for it. Do they understand it exactly? I’m not sure.
Green: Or will they actually use it?
DeVito: I think it’s really coming down through compression. There’s an aging rep force. There are going to be fewer reps with more money. No one’s doing it the old way now with picking stocks because you just don’t have time.
You have a smaller number of advisors with larger amounts of assets, and they have to be more efficient, whether it’s like Lon says with technology or a platform that allows them to do it. The DOL and all the regulators are going to push us to probably a different place, also.
Dolber: I seem to be getting the same things coming up that have come up for the last 10 years, which is the firm that they were with doesn’t understand their practice. Typically, it’s basic things. It’s cultural things. ‘They just don’t know who I am.’ I hear that more than anything.
Green: They don’t feel valued.
Dolber: They don’t feel valued. They don’t feel like the firm even knows who they are. It’s not really supporting them in their development. That’s a fundamental thing. That gets back to the relationship side of the business.
I can’t remember the last time somebody asked me about did we have a robo capability. I hear about succession planning. I do hear about that. I mainly hear about service, compliance and culture.
DeVito: I think that comes down to our discussion before. We have four people in here who are owners of the business, and some of these firms have commoditized themselves. They’re huge. They can’t know every rep. There are just too many people in one department that may be piecemealing service to them.
Dolber: That’s a good question, actually: How many customers can you have? Let’s go to the advisor level. How many customers can an advisor really have? This whole notion of A, B and C [customers], I never bought into it. There’s only one customer — the one you want. That’s any customer. There’s no such thing as B and C.
I actually have a book of business. I tell advisors, ‘I use the same forms you’re going to have to use.’ Then, I give them an example. I said, ‘I don’t know if some of the executives that run firms today can really decide what the broker-dealer future’s going to be, because they’re not users. A good example of this is Steve Jobs. He had a prototype for the tablet, and he went to his first boss at Atari. You know what the CEO, former CEO, says? “There’s no keyboard. Nobody’s going to use that thing. There’s no bloody keyboard.” You know what Jobs’ answer was? “They’ll get used to it.”’
We had hired Ram Charan, who is a well-known consultant. I asked him, ‘How did Jobs know?’ He said, ‘Lon, he had the tablet for a year. He had the prototype. He got used to it.’
He knew the public would get used to it because he was a user and he got used to it. I play big on that when I’m sitting with an advisor and I tell them, ‘I have a book of business.’ In fact, I probably have more experience as a retail rep than I do even as a chief executive officer. Maybe on some level, because I’m a user, I have a good sense of what the advisor wants and needs.
Stringer: I would say the same thing. I’m a member of a practice. Three of us own the firm, and we have a pretty robust practice. We eat our own cooking, so we understand. There’s always an advisor at the table when we’re trying to make our decisions. They’re like, ‘You mean you want me to have this disclosure signed by my client?’
We put ourselves in those shoes going, ‘How are we going to explain that one? How are we going to do this?’ We always have somebody at the table who’s looking at it through the lens of the advisor.
Schwartz: When people come in, the main thing they’re looking for is culture. They want to see, ‘Is this the culture that feels comfortable?’
If somebody’s in our office for six hours, they’re definitely spending an hour on technology, and they’ve probably had a demo of another hour before they ever came.
It’s been two years since robo was invented. What you think of as robo, the Wealthfronts or whatever, that’s maybe 2% of their question. It’s really, ‘What can you do for me?’ It’s heavily about how easy is it to open accounts, monitor compliance and manage money. Those are the things they’re looking for in their technology. Then pricing, things like that.
Stringer: I would imagine robo-advisors on that S-curve, and we’re probably in that early adopter phase. We haven’t gotten to early majority yet where it starts becoming like a cell phone, ubiquitous [and] everybody’s got to have it.
Schwartz: We’re not going to get out of that 10% place for a number of years still in our space. We’re in the 1% factor right now.
DeVito: The conversations that I have when they come into my office, sitting in a conference room, are the same. They ask quickly about your tech. What kind of platform you have, what do you do here, do you have robo, yes or no? It’s about culture. It’s about fit.
Just like it’s a service business and a relationship business for them, it’s a relationship business for us. We don’t spend a heck of a lot of time in the room initially, at least. The technology part and the demo part happen after they almost decide. They come here and it’s about culture: who we are, how we’re going to handle them, how we’re going to talk to them.
Stringer: We went through a Ritz-Carlton service training, the executive team did. We’ve got our five critical success factors. One of them is platform. We have to be competitive with everyone, and we’ve got some great competitors. They raise the game.
Culture, employee engagement, clients for life, platform excellence, and they want to make sure we’re financially sound.
Dolber: We recently hired a Six Sigma black belt to institutionalize our service process. We were using Salesforce, and we had metrics, and we can look at the calls and the call rate, all that, but that’s not service excellence.
The first lesson I had was, by the black belt — I thought it was karate — he said, ‘If any process doesn’t serve the customer it’s not important.’ That’s the first thing you learn. It must serve the customer or it’s not important.
Stringer: In my wallet I’ve got my credo card that’s got our 12 service values, our three core values, our motto, our credo.
Dolber: I heard at a Pershing conference former CEO for Ritz Carlton, Horst Schulze, speak. He asked the question, ‘What is the most important type of client?’ People had different ideas, but he said, ‘The most important client is a loyal customer.’
He says, ‘What creates a loyal customer? Only one thing, and that’s trust. What creates trust? Repeated service; that’s the only thing that creates trust […]’ When you sign up that new rep, I’m not saying they don’t trust you, but they’re neutral. You can’t say they trust you until you prove to them you will do what you said you were going to do, and that takes time.
Schwartz: We’ve been on the same trail, and I think this ties back to the pricing that you talked about earlier. Basically, if pricing is going to get squeezed, which we believe it is, the only way you can fight that is to get more efficient. There are some things you can do, but you have to squeeze your costs down. Continuous improvement is the term we’re using for it.
For example, we have processes in operations with 112 steps in them. Now, we’re talking about every step, like you move the paper from here to here. We’re not talking like three weeks’ worth of work. But still, to open a new account when there are 80 pages of forms could easily be 110 steps.
This form has to go here and it gets scanned there and this person has to review it and then this other form goes over here. Then there’s a blank in it, so you have to go do this — 140 steps in some cases down to 50 steps.
That’s continuous improvement. That is making sure that every step matters and they aren’t going back into the same thing three different times, or you aren’t entering the data in three different places.
Dolber: You get a maturity in an industry, then consolidation, and then you get fragmentation again.
It’ll mature, consolidate, but then it’ll break apart because you have these upstarts that’ll come with a new way to do things like Apple. You think about that ad: They show a guy up on the screen. He looks like a communist leader, and they got a bunch of skinheads […] all bald, all in gray suits just sitting there listening to this guy screaming on the screen. The only one in color was that girl who came running in. She threw the hammer at the screen, and it broke. The wind comes out of the screen, and it’s blowing on them, and they’re blowing away. It says, ‘Find out why 1984 won’t be like 1984.’
They didn’t say IBM, but they were pointing at IBM, clearly. There’s an upstart. Look where they are now. Now, they’re a mature company at the top of their game, but not then. Imagine if you bought Apple stock back then.
I think you will see continued consolidation, bigger and bigger, more controlled, but then you’ll see fragmentation as upstarts come along and companies find different ways of doing things.