While broker-dealers and asset managers will continue to adopt robo-type technology to ensure they can profitably service smaller accounts under the Department of Labor’s fiduciary rule, traditional pure-play robo-advisors will likely fade and morph into technology offerings that also offer a human touch.
So says CGI Wealth360 in its recently released report, “The Future of Automated Advice Platforms: Lessons Learned.” The report argues that the shortcomings of pure-play robos “point to a new way” that advisors, online brokerages and other financial institutions can do business under an increasingly regulated advice environment via investment programs delivered through advisor, call center and digital channels.
CGI argues this new “omni-channel” automated advice platform offers “a suite of software that can guide investment decisions and much more,” including tax-loss harvesting, rebalancing, data mining and predictive analytics, helping the “firm and advisor interact with the client through the most appropriate channel.”
Growth has leveled off in the older robo model that uses simple computer algorithms to set asset allocations based on age and risk tolerance, with robo-advisors automating the rebalancing and tax-loss harvesting process to keep an investor’s portfolio on track, CGI maintains.
Robo-advisor services are “being replaced by a broader trend, with financial advisors using computer programs to assist them in offering investment advice and overseeing client accounts.”
A relatively small segment of investors can still have their needs met by pure robos, CGI says, but most investors have broader needs, so both investors and advisors are catching on to the “significant benefits” offered by “digital advice for a digital world, but with humans firmly at the helm.”
David Lyon, founder and CEO of Oranj, a client services and prospecting platform for advisors, agrees that trying to scale the advisor business by eliminating the need for interaction with an advisor is the “greatest shortfall of robo-advisors today.”
Increased regulation, he says, will make it nearly impossible for robo-advisors to maintain the scalability of their business models as well as drive up client acquisition and service costs.
The “real opportunity” that has surfaced, Lyon argues, is for traditional advisors who already have a business model driven by a high level of service to become more efficient and scalable using digital advice platforms. That’s so because the value of traditional advisors is that they “work holistically with their clients to add alpha to their net worth, the one true controllable factor in their clients’ financial lives,” according to Lyon.
Fidelity: First Retail, Then for Advisors
RIA custodians are jumping into the robo-advisor game as well, with Fidelity being the latest with the recent release of Fidelity Go, its retail digital advice platform. Fidelity Go touts features such as portfolios constructed, monitored and rebalanced over time by investment professionals — not simply by an algorithm — available at a minimum investment of $5,000.
Launched in a pilot phase late last year, Fidelity Go offers a combination of a professionally managed portfolio, a digital dashboard, integration with Fidelity’s broader investment tools and services, as well as “an all-in cost” that Fidelity argues is “among the lowest in the industry.”
A Fidelity spokesman told me that details about the robo-service Fidelity is developing for financial advisors will be available by year-end. “The goal is to offer an advisor-centric solution that is integrated into Fidelity’s technology platform for registered investment advisors, broker-dealers and banks.”
The CGI report points to the rise in 2010 of robo-advisor offerings from financial technology firms that provide algorithm-based computer programs to capture a client’s basic details, determine an asset allocation based on age, time horizon and risk tolerance, and offer a “canned product selection based on the asset allocation, and then automate the rebalancing, tax harvesting, billing and reporting functions.”
The pitch for this type of service six years ago, the report notes, touted robo-advisors’ ability to eliminate behavioral biases and handle routine account maintenance without human interaction while significantly lowering costs to the end client.
The idea “made sense to many, and robo-advisors quickly gained market traction,” overseeing $19 billion by the end of 2014, with forecasts of hitting $2 trillion in assets by 2020, the report states. Some of the early players included Betterment and Wealthfront.