Cogent Reports held on Thursday a webinar outlining predictions for the advisory industry in 2016, with a focus on technology, ETFs and marketing.
Robo-advisors are “no longer new or emerging,” Julia Johnston-Ketterer, a senior director in the Syndicated division for Cogent, said on the webinar. The trend is being driven not just by the new services, like Betterment and Wealthfront, but legacy brands like Schwab and Vanguard who launched their own automated advice services, she said.
Yes, robo-advisor users tend to be younger, but they’re not limited to millennials, Cogent found. The age range of the 30% of affluent investors who use a robo-advisor is as high as 50 years old, according to the firm’s 2015 Investor Brandscape report. More than half of robo clients have between $100,000 and $250,000 in investable assets, and are working full time, while 20% are business owners.
Likely adopters of robo-advisors say retirement is their primary investing goal. “That’s not surprising given the Gen X concentration [of likely adopters] and we also have a sizable portion of first-wave boomers in this likely-to-adopt segment,” Johnston-Ketterer said.
Likely adopters also have higher risk tolerances than unlikely adopters, she said.
“This really underscores how serious likely adopters are for making up for lost time since 2008,” Johnston-Ketterer said. Robo-advisor users reported investing an average 61% of their investable assets on those platforms.
“This really indicates to us the commitment they’re making to the robo-advisor, and it’s certainly well beyond play money,” Johnston-Ketterer said.
She added that “we are clearly in the next stage of advice delivery. We’ve got various advice models living side by side, and we are certainly looking forward to analyzing how all these advice models get along or not in 2016.”
She predicted that affluent and Gen X investors will embrace robo-advisors in 2016, more so than they do now, and expects a bigger response from current robo-advisors expanding their services.
Robo-advisors are driving another trend: the move to passive investing, with all-ETF portfolios becoming more popular.
“Traditional active managers are really feeling increased pressure to justify they value of their relatively higher management expenses,” Meredith Lloyd Rice, another senior director at Cogent, said.
Advisors’ ETF usage has increased significantly over the last year, Rice said, at the expense of mutual funds. As a result, providers have expanded the ETFs they offer with smart-beta and active ETF options. About 40% of advisors who use ETFs are using smart beta or active products, Cogent found.
Although there’s a clear trend toward passive strategies, Cogent found the majority of retail advisors have the bulk of their assets in actively managed investments. The RIA and bank channels tend to rely more heavily on passive investments, according to Rice.
ETF usage is up 53% over 2012, rising from 9% of advisors’ total AUM allocated to each product, to 14% in 2015. By comparison, mutual fund usage is down 5%.
She predicted an advisor-driven adoption of rules-based ETFs in the near term. “There’s certainly a lot of potential for active ETFs to take off as well, but this trend will likely take a longer time horizon to develop,” she said.
Sonia Sharigian, a senior product manager for Cogent Reports, said that digital marketing efforts are increasingly important for providers trying to reach advisors.
“All year long, I’ve been touting the power of digital,” she said on the webinar, “and have been lamenting over the fact that beyond website visits, providers have very limited reach.”
She said 2016 will bring more opportunity for advisors to engage with their partners through mobile apps.
Data — collecting it and using it — will be another defining trend in 2016, according to Linda York, a vice president at Cogent. “Big Data is at the heart of a trend we’re seeing have more and more impact in our industry,” she said.
Big Data affects firms’ marketing and sales efforts, and those that don’t use data effectively are “swimming upstream against stronger and stronger currents.”
Firms across all industries are combining multiple sources of data, she said, including CRM data and transactional data. “Specifically in the financial services industry, we see as competition for the attention and assets controlled by financial advisors intensifies, asset managers are focusing on ways to better identify, target and communicate with advisors about their products and services,” she said.
4 Types of Advisors
Cogent identified four different segments of advisors based on how they engage with marketing efforts from asset managers and product providers. “Insight enthusiasts” value all forms of information and data they get from their partners, York said, noting they’re “particularly interested in getting market commentary from star managers.”
“Data vaulters” want to keep and store as much information as they can and value printed materials, which they use in client presentations.
“Digital devotees” want access to data on digital platforms, while “selective oracles” will independently seek out information on their providers’ websites. “They’re not afraid to disagree with a star manager and they tend to prefer data in very rich content, thought leadership types of pieces,” York said.
She predicted the leveraging technology to comb through data and better segment clients will become the standard for the financial services industry in 2016. “If you’re doing this well, your audience won’t even realize it’s happening,” she said. “It’ll just seem natural in terms of your outreach and communications.”
— Read Among Affluent, Millennials Have More Assets Than Gen X: Cogent on ThinkAdvisor.