[This article appears in our February 2017 issue of ETF Report.]
Robo-advisory technology has been around for nearly 10 years, and rather than being the death knell of financial advice, more advisors are looking at them for the convenience and efficiencies they offer.
No longer are they being seen as an all-or-nothing, but as a means to either connect with new clients in a way that might not have been feasible previously, or as a way to automate mundane tasks and scale business efficiently.
For advisors seeking to incorporate this technology, there are a few key criteria and other factors to keep in mind.
Benefits Of A Robo
Financial advisors who use robo technology and firms that provide the platforms say the biggest benefits for financial advisors is making back-office tasks more efficient. How much technology an advisor uses is now customizable, says Greg Vigrass, president of Folio Institutional, which provides a variety of robo-advisor services.
“The magic that’s coming out of the robo trend isn’t around black-box algorithmic investing. It’s really around automating the business process [and] moving to a digital engagement model ... engagement by the client, at the level that the client wants to be engaged,” Vigrass said.
Meb Faber, chief investment officer and portfolio manager of Cambria Investment Management, whose firm partnered with Betterment in 2016 to offer a robo solution, agreed that automating tasks like online-account opening and account funding is a huge timesaver.
“It takes a lot of pain points and time points and turns that into actual client acquisition,” Faber said.
While he admits his firm is a little different than most independent retirement investment advisors, Faber says they were surprised at the consumer demand for their Digital Advisor portfolio. Cambria onboarded about 400 accounts in the first three to four months. While not all of the accounts were funded immediately, it’s starting to see funds moving in.
‘Huge Client Acquisition Tool’
“The point is to show advisors, that if you enable it, it’s a huge client acquisition tool. For us, we don’t care what the product or the offering is, we want to best serve the customer in the way that’s most comfortable for them,” Faber said.
One of the initial fears of robos was that their asset allocation models would drive advisors out of business, but Faber says those worries are groundless.
“Once advisors realize their main value-add and alpha [generation] was not in the asset allocation, but rather in the traditional advisory value-added services like estate planning, taxes, wealth management and behavioral coaching, then they fear the technology less,” added Faber.
Faber says when looking at robo platforms, asset allocation offerings on the platforms aren’t what differentiates them, unless the service allows some customization. Cambria’s Digital Advisor portfolio is a mix of its own ETFs and offerings from Betterment.
Advisors need to understand how the robo is set up and the true costs. Some might offer free trading but may require high cash balance minimums or higher account management fees. Then look at the software process and how seamless it is to onboard the client, Faber notes. If the technology doesn’t allow online account funding, it may require clients to fax forms, adding more work for the advisor and client.
Cara Reisman, head of business development for Betterment for Advisors, Betterment’s digital wealth management platform offering for registered investment advisors, says that, in general, advisors should remember robo technology has a clear role for the advisor as well as the advisor’s client.
“It’s not just about ‘what’s in it for me [as an advisor)].’ That’s critical, and, foundationally, that must be there, but it’s also about ‘what is that account-opening process like for my client?’ They should be thinking not only about how seamless is it for the client to do money transfers, but how much transparency do clients have in their portfolios? How much transparency do the advisors have in their portfolios?” Reisman said.
Kristen LeClair, senior vice president at Kestra Financial, where she runs the firm’s wealth management products, platforms and product offerings for its financial advisors, explained her discussion with the firm’s advisors who used Kestra’s chosen software. The advisors told her they weren’t necessarily looking to add a number of small accounts to actively build business, but found it useful to start connecting to the heirs of existing clients, who might have money one day.
Additionally, it was an easy way to add smaller clients who were referrals from wealthier clients.
“These might be a friend or family of a big client. They’re someone [the advisor] couldn’t just say no to, but didn’t have to offer the same full-value service proposition,” LeClair said.
Potential Pitfalls For ‘Full Robo’
It’s tempting for advisors to go full robo, especially with smaller accounts, but Scott MacKillop, chief executive officer of First Assent Ascent Management, says by doing so, they might be running afoul of the Investment Act of 1940 and the fiduciary standard.
Regulators, law firms and others versed on the topic are still waiting to see what happens, but MacKillop said there’s a “looming question” of whether the purely automated platforms really satisfy those standards and the ’40 Act. He feels if the advisor is doing the pure direct-to-consumer robo with no intervention, no interview or real interaction with the client, then they might be taking a risk.
“You really don’t know their goals and objectives, and you really don’t understand their tolerance for risk [without an interview]. There are just a lot of factors to consider,” MacKillop said.
The level of interaction doesn’t have to be significant, he notes.
“Maybe have even a five-, 10-minute phone call with the client, to document it. They don’t have to invite the client into the office or have them fill out a gigantic form with all their financial information, but some level of review, so that it’s not just purely a mechanical type of process, which screams for some sort of regulatory problem down the road,” added MacKillop.
‘Robo With A Heart’
Having the human touch is critical, Faber says, because behavioral coaching is what sets advisors apart from pure robo technology.
“The No. 1 thing advisors do is … keeping clients from doing dumber things. None of these robos existed during a bear market. It’s just a fact. None were around in ’08. So not having the client … jumping off a cliff when times get tough is hugely important,” Faber said.
This hybrid model of some technology and some personal service seems to be where robo advisory is going, Faber notes. The large custodial firms like Vanguard have what he calls an “advisor-lite” service, where they offer some advisory, even if the person on the other end of the line isn’t dedicated to the client.
Scott Puritz, managing director of Rebalance IRA, says the “robo with a heart” allows advisors to pass along the lower costs that come from streamlining back-office duties, and that using ETFs makes the service reasonably priced.
But it’s the discussion advisors have with clients that helps with a better portfolio fit beyond pure robo, particularly for middle-aged and older clients, whose goals may deviate from common expectations.
For instance, a typical robo questionnaire may suggest a 70-year-old investor have a portfolio skewed heavily to income, but if an advisor learns this investor doesn’t plan on living on that money and instead has it earmarked for a legacy, “suddenly the portfolio flips from income to growth,” said Faber.
Not Everyone’s A Fan
Despite the inroads the technology has made, not everyone is sold on using robo-advisory services.
Christian Wagner, president, Penn Investment Advisors, doesn’t use it in his firm. While Penn uses technology for client onboarding, performance reporting and operations, Wagner says robos don’t provide the highly specialized wealth management service needed for high net worth individuals and families.
“In the near future, these automated platforms will provide more and better basic advisory work for families in the lower strata of the mass-affluent segment. It seems unlikely that developing customized, cutting-edge tax or investment strategies will be possible without individual relationship managers capable of analyzing client needs for a long time, however,” Wagner said.
Additionally, he says the massive move to passive investment strategies like ETFs coincided with the rise of robo advisors, but that this stylistic shift could change rapidly if active strategies become popular again.
Further, he says, there’s other technology infrastructure being built by turnkey asset management providers that independent RIAs and financial planners can use “to successfully compete with robo advisors without the need to invest in proprietary technology.”
As advisors think about their goals when contemplating adding a robo, they need to think how adding the technology may change the culture of their firm, because people sometimes underestimate the impact a technological shift can have on the firm, Folio’s Vigrass notes.
“They have to look at what the culture of the firm is today, and what this does to the culture, because most independent advisory shops are very much culture-driven organizations—more often than not driven by the owner. You need to figure out how you’ll maintain your value, maintain your brand and emphasize the uniqueness of the advisory firm,” he added.