5 Questions Most Advisors Aren’t Asking When Selecting a Robo

A basket of mutual funds and ETFs may be fine for some clients, but clients with more complex investment needs may require a broader array of investment vehicles. Individual bonds could produce more income for a client with greater tax efficiency than a fixed income fund. There are also client customization options and tax-aware trading techniques available within separately and unified managed accounts that simply aren’t possible with mutual funds and ETFs.

Yes, higher asset levels are often required to leverage these vehicles and maintain diversification, but technology innovations are making UMAs viable in smaller and smaller accounts. Ideally, a client can seamlessly shift to a more complex portfolio as their needs evolve. If your robo solution only supports mutual funds and ETFs, what’s the process and client experience for someone who begins with the robo offering but then needs to access a broader array of investment options?   4. Is the advice being provided consistent with your overall practice and the advice you provide to clients directly?

With the specter of new Department of Labor rules looming, advisors would be wise to carefully scrutinize how a robo will fit into their practices. Most robos don’t allow the advisor to adjust the algorithms, investment assumptions, eligible products/securities, or otherwise tailor the portfolios being generated. Differing capital market assumptions could lead to the robo tilting toward market sectors you shun. Or the robo could be buying into mutual funds or ETFs you are selling.

Perhaps these differences are OK and there is no misalignment, but consider a situation in which one client with a small account you steered to the robo has a dramatically different outcome than another client with a large account you manage directly. The accounts were opened on the same day, both clients have a similar risk and return profile, and both have a similar investment time horizon – the account size is the only real difference. Of course many factors could lead to the differing outcomes, but will you be prepared to defend to a regulator that each account was handled in the client’s best interest?

5. Can the robo technology effectively integrate with your custodian and other critical systems?

In order for an advisor to scale their operation and maximize the ROI on technology, integration is table stakes. This starts with the custodian. Many robos are bound to a single custodian or are themselves the custodian, and you should consider the implications if your primary custodian is another firm. For clients with accounts split between the robo and your primary custodian, there will be different approaches to mundane things like cash transfers as well as differing client experiences for account access and reporting. Advisors need to gain a clear understanding of the robo’s ability to integrate with other systems and best-of-breed third-party apps that advisors may incorporate into their practices.

This is especially critical for client performance reporting, particularly when a client has accounts with the robo and directly with you. You need to be able to answer the question every client asks: how am I doing? Answering this question will require some form of consolidated reporting for clients with multiple accounts. If you plan to rely on the robo to aggregate client accounts and drive client reporting, consider questions 1 and 2 again.

The robo disruption, or awakening, has accrued enough headlines to influence the strategic direction of many firms both large and small.  Before your firm considers robo technology in earnest, it’s important to take a step back and consider whether the solution will flexibly scale to augment the advice that you provide today and in the future across the continuum of clients you serve.  Asking the aforementioned questions is a good first step.  If you are interested in learning more about Vestmark’s approach to robo enablement, please visit the Vestmark website.