A new report by Cerulli Associates shows that the vast majority of U.S. consumers are not getting the financial advice they may want and need because their portfolios are too small to attract the attention of financial advisors.

Cerulli suggests that digital advice could provide a solution for these consumers.

According to the report, 71% of American households — 89.6 million of them — have less than $100,000 in investable assets, and a mere 8% of advisors target this cohort.

The typical consumer will find few advisors willing to accept them as a client, the report said. The average IRA rollover balance is $119,300, while the average balance of a rollover IRA captured by advisors is $136,800.

Both of these asset levels barely open consumers up to more advisors. Just 29% of advisors target investors with assets in the $100,000 to $500,000 range.

“The mass market and the lower end of the middle market are underserved by financial advisors,” Cerulli associate director Tom O’Shea said in a statement.

“It is not that advisors are unwilling to help small investors,” O’Shea said. “Rather, they cannot figure out how to make money when working with them, leaving investors to go it alone or rely on guidance provided by direct-to-consumer firms.”

The report said financial industry lobbyists believe that the Department of Labor’s new conflict of interest rule will make it difficult to sell mutual funds that charge sales loads to a retirement account holder.

Absent income from these commissions, brokers will abandon the small investor, they think.

A Robo Fix

Executives at managed account sponsors and third-party vendors, such as Envestnet and Jemstep, appear to believe digital advisors can fill the void left by advisors who are unwilling to take on smaller investors.

The report said they rate the ability “to service less profitable and/or smaller accounts” as the top motivation for incorporating a digital advice offering into their platform — along with engaging millennials and spending more time with clients.

They are also motivated to create a digital advice offering in order to respond to upcoming DOL regulations by offering a low-minimum, inexpensive managed account product.

The report noted that Secretary of Labor Thomas Perez singled out the digital advisor Wealthfront as a firm that delivered low-cost advice in a fiduciary construct.

Yet, digital advisor startups face stiff competition from large retail direct broker-dealers, the report said. The digital advice model may not be sustainable for firms that have not achieved marketing scale, such as Charles Schwab and Vanguard.

One executive told Cerulli, “The robos have figured out how to scale everything but client acquisition.”

Cerulli said that whether startup digital advisors targeting consumers have a viable business model should concern the DOL. “One would hope that the secretary of Labor would not unwittingly promote a service that may acquire clients, based partly on the DOL’s encouragement, only to abandon them because the firm has not achieved the marketing scale necessary to remain a growing concern.” Human + Digital Advice

Financial advisors are not immune to the automation that is sweeping through all the professions, yet algorithms have limitations. For one thing, Massachusetts’ attorney general pointed out, fully automated robo-advisors cannot carry out due diligence in the way a human can, for example, to determine who the user is.

According to the Cerulli report, a digital advice tool will be most effective at meeting fiduciary standards if a human advisor uses it for the foreseeable future.

“Digital advice innovation presents an opportunity to enhance the efficiency of advisors servicing small accounts,” O’Shea said.

“Combining human and digital advice can strengthen the fiduciary foundation of the client recommendations. This combination also allows an advisor to scale their practice in such a way that he or she can profitably manage the smaller accounts of mass-market consumers.”

Cerulli said its research suggested that independent broker-dealers and small registered investment advisors were the primary advisors for clients with $100,000 or less in investable assets. It said 53% of IBD advisors described their core market as clients with less than $500,000 in investable assets.

Only the insurance BD advisors show more inclination to support mass market and middle-market clientele, with 58% saying they catered to consumers with less than $500,000 in investable assets.

Yet, new DOL regulations may reduce this percentage considerably as insurance BD advisors discover they can no longer sell lucrative variable annuities and other high-commission products to IRA customers, the report said.

With insurance BDs exiting the mass and middle markets, solving for how to support the small investor becomes an IBD problem.

Cerulli said the solution lies in creating an efficient advisory platform that permits advisors already targeting this segment to become more profitable and their business models more sound.