At the recently held MarketCounsel Summit, three advisor technology experts gathered on stage for a seminal panel discussion on how the industry is looking at robo-advisors with eyes wide open now that we as a profession have had a few years to better understand their capabilities and ultimate role.
Led by T3 publisher and industry tech guru Joel Bruckenstein, panelists Aaron Klein, CEO of Riskalyze, and Ed O’Brien, CEO of eMoney Advisor, provided provocative commentary on where this is all headed.
Particularly now that the industry is processing what the delivery of financial advice will look like in the post-DOL fiduciary world, a new picture of the robo threat is emerging. While there is some uncertainty about whether or not the DOL rule will be ultimately modified or delayed due to the new Trump administration, the industry has clearly accepted the notion that the fiduciary movement is fully underway (just go ask Merrill Lynch and JPMorgan if you have any doubts), so this focus on robos in a post-fiduciary world was very timely.
The upshot from the panel? Once you pull the hype and mystery of robo-advisors back, it becomes clear that there are serious, potentially life-threatening weaknesses for these platforms. Another key conclusion is that although advisors now have the ability to also deploy these capabilities, there is still much confusion from a strategic point of view if it even makes any sense for advisors to do so.
“I don’t see fiduciary advice coming from robo-advisors,” said Klein of Riskalyze. “It was actually quite smart of the direct-to-consumer robos to label themselves as advisors; however, ultimately they are really just self-directed investing platforms.”
To back up his point, Klein offered up the story that anyone coming to a direct-to-consumer robo-advisor for advice will be told to invest, no matter what his or her personal circumstances. “Their online forms and ultimate product offering is solely focused on investments. They only ask about your preferences for investing, nothing about your entire financial situation. For example, if you have large balances on credit cards or student loans, most likely the best advice would be to pay down that debt before investing in the markets; however; that is not the recommendation you will receive.”
Is that advice in the clients’ best interest? Would it survive a fiduciary test? The panel agreed that this issue, along with many others, could place these direct-to-consumer robos in hot water with regulators and plaintiff attorneys.
Building a ‘Digital Ecosystem’
From a profitability point of view, the consensus was that the cost of client acquisition was so large compared to the actual revenues received by robos that ultimately these VC-backed direct-to-consumer technology plays will run out of money and be sold off for parts.
The good news for advisors is that the industry is learning there are aspects of the robo experience that can help them in their businesses.
“Every client is looking for a better digital experience around their goals and plans,” said O’Brien of eMoney. “The key is to build a digital eco-system around planning that extends to meet your clients’ preferences for how they want to work and collaborate with you on their preferred device.”
O’Brien encourages advisors to think of a digital platform as simplified planning to get started with clients so they can more quickly engage them in the core concepts of spending less and saving more. “Once you’ve gotten clients working with you on a digital platform for simple planning, then the ability for account opening, moving money, can be done on a low-cost, self-service basis,” O’Brien says.
“By integrating this technology approach with the advisor side to work on the more complex planning issues, you have a powerful combination of technology and human advice that will differentiate you and set you up for more scalable delivery,” he added.
An important aspect of this approach, according to Klein, is to strategically align your clients’ technology experience to what you are looking to accomplish with your business. “The last thing you want to do is to strap a self-directed robo silo onto your firm,” he advised.
Klein looks at robo elements in three priorities that can be integrated without having to support a separate entity. These include automating client engagement and account opening with an integrated digital platform that can also extend to automating the asset management component in a unified approach, not through a separate, stand-alone website.
“Firms that run out and create robos that provide a separate and distinct experience from their ‘real’ business create a huge challenge for themselves, including the hassles for switching them once they ‘grow up’ and now qualify for your full-service approach,” Klein said.
On the other hand, Bruckenstein noted that with the speed of technological change, and improvements in artificial intelligence and big data techniques, all of these early systems will get better and more comprehensive over time, providing a wake up call to advisors to not be complacent.
What that means for advisors, according to O’Brien, is that if advisors “are not embracing technology, I do worry about them keeping up in the next five years.”
To learn more about what went on at the MarketCounsel Summit, check out the many tweets on the #MSUM16 hashtag on Twitter.
— Read How Advisors Can Best Use Tech for Firm Growth, Profitability on ThinkAdvisor’s TechCenter.