Technology, be it in the form of robo advisors or digital tools, have forever changed the traditional financial advisor landscape. Michael Kitces, partner and director of research for Pinnacle Advisory Group, who also publishes the financial planning industry blog “Nerd's Eye View,” offers here a glimpse into what’s at stake for advisors out there who want to survive—and thrive—in the digital age. Kitces will be a speaker at the upcoming Inside ETFs conference next month.
ETF.com: You’ll be speaking at Inside ETFs about the future of investment advice in the digital age. Can you give me a preview of your core message?
Michael Kitces: The core message is that the introduction of technology and robo advisors into the landscape is not the end of financial advisors any more than the internet was in the late 1990s, when similarly we said, “Well, we've got E-Trade now, why do you need a financial advisor anymore?”
The internet didn't replace financial advisors. The internet became the platform that all financial advisors used to build their business. We're going to find over 10 to 15 years that the exact same phenomenon is about to happen with robo advisors—they're not actually a threat to financial advisors and what they do, but they are going to commoditize a core aspect of what financial advisors do and get paid for, which is basic asset allocation services.
The pressure that introduces for advisors, simply put, is that we have to step up and move up beyond what we've done historically. Robo advisors aren't necessarily here to disrupt or eliminate financial advisors, but this is one of those inflection points where you have to move up the value chain and offer more, or you’ll be put out of business by a robo platform.
ETF.com: Does every financial advisor today need some sort of robo-advice solution or a digital element of their practice?
Kitces: Yes and no. If you’re doing asset allocation by hand with an Excel spreadsheet, your business will be dead in five years or less. Now, what you have to replace that with isn't necessarily a robo tool. What you can replace that with is automated rebalancing software, which is basically what robo advisors do. But the truth is, financial advisors have had rebalancing software to automate this for 12 years. The first one came out in 2004.
So what's the difference between a robo advisor and a financial advisor that uses automated rebalancing software? My answer would be, nothing; there is no difference. It's a difference in terms, it's not a difference in substance.
Do advisors need to adopt robo platforms? My answer would be, no. But you need to use technology that does what robo platforms do. The reality is, advisors have had technology to do what robo advisors do for a decade. We just didn't adopt it. Today using none is not an option.