How Financial Advisors Can Adjust to Robo-Advisors

The growing popularity of online investment advice platforms – otherwise known in the industry as “robo-advisors" – are keeping many a financial advisor on edge, wondering if they will slowly lose much of their business to an algorithm. Their fears, some say, are not well-founded. The wealth management business holds some $27 trillion in assets, but online advisory programs are already chipping away at that sum.

These Web-based advisory services have, indeed, become increasingly appealing to investors who now believe that advice should come cheap or cheaper than what the wealth management industry has been selling it for, according to a recent report put out by the Fox Financial Planning Network.

Online advisory firms typically work by asking new clients a series of questions about their finances, goals, and tolerance for risk. Using computer models they are then able to recommend various investment choices that best suit that particular investor. The portfolios these programs suggest can also be automatically rebalanced for an extra fee extra.

Despite the ease and growing popularity of these online platforms, there are still many steps that advisors can take to make sure they remain relevant to younger clients (who could eventually become older, wealthier clients). One sure-fire way is for advisors to lower the fees they are charging for investment management services, and making up for the loss by increasing the fees they charge for other, more specialized services, such as tax advice and estate planning. That’s because online platforms charge just a fraction of the amount in fees that personal financial advisers do. In fact, the industry as a whole needs to become more transparent about pricing practices and get on board with lower fee schedules, according to the report. 

Traditional wealth management firms typically charge a fee equal to 1% of assets under management to manage a client's investments and advise on estate planning and other financial issues, such as insurance. Robo-advisors fees, by contrast, typically come in at about a third of that. So it’s a steep curve that wealth advisors must overcome. Another point on fees that advisors should remember is that the use of algorithmic models is not a new phenomenon in the wealth management industry. Advisors to high-net-worth clients can and should tout their use of specialized models, as well.

The advent of robo-advisors has also lead to a new industry term, “robo shield” that was coined by Deborah Fox, the founder of the Fox Financial Planning Network. It refers to the streamlining, staffing and practice management changes that firms should be implementing to protect their business from the competition that robo-advisers represent.

One way Fox suggests that advisors can create such a shield is by upgrading their use of technology to be more effective and by creating operational efficiencies that will enhance client services. For instance, she recommends that advisors adopt technologies that offer online portals for clients to view their accounts at all times. Using these portals, advisors too will be able to keep an eye on client accounts and be able to alert those clients when changes in their portfolio may need to be addressed.

Advisers should also consider striking up a relationship with an online adviser platform provider in order to offer “Tier 2” services to potential clients who are looking for advice, but who do not meet an advisory firm’s minimum asset requirements, such as the children of clients. Tim Welsh, president of adviser consultancy Nexus Strategy, which helped in the development of the Fox report, notes that by white-labeling a robo-adviser platform service, an advisor may be able to provide a lower-end offering to clients rather than having the platform provider give some of those services away for free.

One such service is Jemstep Advisor Pro, which offers an automated client engagement, onboarding and service platform. Another is Charles Schwab's Institutional Intelligent Portfolios, which allows advisors to put their own brand on the digital platform. It features some 200 ETFs drawn from 28 asset classes, performance reporting, automated rebalancing, integration with Schwab's systems and tax loss harvesting for accounts over $50,000.

That said, advisers would be wise to take their time in figuring out the best online services to team up with, as not all robo-advisors are created equal. To help find the best match, advisory firms should consult the Fox report, as it offers some guidance about which online firms may be the most amenable to teaming up with an advisor.

The Fox Planning Network report has also come up with a list of 20 “practice-changing” initiatives that advisors can adopt to better overcome the competition robo-advisers are presenting. Some of those practices include systematizing and standardizing service pathways, automating workflow procedures, lowering asset under management fees, and adding an annual retainer. Other good ideas include embracing social media, becoming known for serving a niche, and creating a culture within the firm that always puts clients’ interests first.

Another thought to keep in mind is that it’s actually a myth that high-net-worth advisors and online investment advisors are adversaries. The truth is that wealth managers and online service providers actually respect the quality of each other’s offerings. For the moment, robo-advisors are still unable to offer many of the services that human advisors can offer, such as significant tax, estate, and insurance-planning services. So working together could be the ideal situation.

That said, a report from MyPrivateBanking notes that many traditional wealth management firms are still unprepared for the threats now being posed by robo-advisors. But the numbers don’t lie, and in fact, show that more and more assets are being eaten up by robo-advisors. According to the MyPrivateBanking report, the assets under management for all registered investment advisors are now at about $5 trillion, and robo-advisors now hold about $14 billion of those assets. Going forward, the industry could see an even greater amount of assets moving online, as lower account thresholds and the growing popularity of online platforms become more popular with today’s more technically advanced young professionals. 

There is also an increasingly large amount of investors who actually prefer the use of technology or Web-based advisor programs, despite having sufficient enough assets to fall into the traditional high-net-worth client category. On the other hand, online platforms could well become a gateway for or “emerging affluent” investors who will likely move to wealth managers when they have more money to invest. That’s why wealth advisors may also want to consider opening up their advisory services to investors with less than their minimum investment threshold now, as a way to continue building their business.

At the moment, the majority of the business going toward robo-advisors is still coming from those investors opening accounts in the $20,000 range. And while it's plausible that more clients with much larger wealth holdings may one day also move to the online model, if advisors can figure out better ways to serve them – by offering more specialized and nuanced approaches, they should be able to retain and continue to attract their typical clientele.

Other ways advisors may continue to attract clients is by unbundling services, reducing some of their fees, continuing to offer sophisticated tools and models, and meeting with clients face to face. One can never underestimate the value of building strong relationships, especially when an investor has a question about their portfolio or concerns about their financial future and wants it answered immediately; it’s a human advisor, not an online program that will be there for them.

If advisors want to guard their businesses against competition from robo-advisors, they may need to reduce their fees, increase their use of technology and provide more specialized and personal services. They should also consider utilizing one of the automated advisors for advisors to supplement their services and gather clients who could be affluent in the future.