When Robo Advisors Changed Advice

It’s not an outcome most expected.

Reviewed by: Debbie Carlson
Edited by: Debbie Carlson

[This article appears in our February 2019 issue of ETF Report.]


When the robo advisor platform debuted in 2008, the concept struck terror in the heart of financial advisors, who thought their services would be outsourced to technology.

Eleven years later, robo advisors haven’t supplanted financial advisors. Some advisors still may be wary; others see them as an efficiency tool and a way to scale up business or add smaller clients they otherwise couldn’t serve.

Dan Egan, director of behavioral finance and investing for Betterment, a robo advisor, says robos could more efficiently handle the “low-hanging fruit” services that advisors were providing previously, such as creating simple financial plans that outlined how much people needed to save, what type of individual retirement account to use or how to optimize taxes.

But advisors have adapted, and are now spending less time managing portfolios, researching specific stocks or processing trades.

'Moving Up The Value Chain'

“They’ve done what I generally consider ‘moving up the value chain,’ because they’re doing less routine noncognitive labor,” Egan said. “They’ve outsourced a lot of that to technology.”

The worry was that robos would undercut advisors, and clients would have no reason to seek advice. But the reality has turned out to be a bit different, says Jay Batcha, founder and chief investment officer of Optimal Capital.

Yes, robos allow people with very small accounts to invest, he notes. But as those assets grow and their needs become more complex, investors seek advice, creating a sort of human-technology hybrid of financial planning,

“It’s turning into part of the ecosystem. It’s the financial technology all of the advisors are using at this point … whether it’s for building models, trading models or rebalancing models,” Batcha said. “It’s used as the backbone to be able to manage accounts efficiently, but in conjunction with advice. That’s where it’s gone.”

Todd Rosenbluth, senior director of ETF research for CFRA Research, concurs: “For some advisors, this is a tool in their toolbox. There’s a wide range of value-adds that an advisor can provide. Security selection is just one of those.”

Dramatic Impact

John Foxworthy II, director of financial planning at Mahara Wealth Partners, whose firm uses robos, says the technology made a “dramatic” impact on the advisory industry.

“It’s very similar to when automated tax software like TurboTax became popular,” he said. “Those who didn’t provide any value-added services were hurt by it, but it didn’t run CPA firms out of business, because it’s a people-based business.”

Foxworthy’s firm is considering moving a large portion of its assets under management to robos, saving its proprietary asset management platform for large accounts only.

“The increased popularity of robo-advisor platforms will cause financial advisors to be more creative and find ways to provide enhanced services to their clients,” he said. “Those who can provide and communicate that added value will be the ones that are the most successful.”

Beyond Security Selection
It’s not that advisors have completely surrendered security selection to robos, says Joseph Raieta, managing director of investment solutions at Snowden Lane Partners.

“The focus 25 years ago was solely on security selection,” he said. “Now it’s a wider view of what that financial advisor relationship is.”

Robos fill a need, helping people with just a few hundreds of dollars to invest get advice, which is good, Raieta says, noting that when people have more complex financial needs, they come to see advisors. 


Source: "The Evolution Of Robo-advisors And Advisor 2.0 Model," Ernst & Young, 2018


Egan agrees that robos still can’t handle more complicated needs, such as selling a business or setting up trusts for family members. That’s where financial advisors step in.

A global wealth management report by Ernst & Young  (EY) looking at the evolution of robo advisors says financial advisor clients value three aspects of the human relationship: whether their advisor understands their objectives; that they can engage with the advisor as needed; and trust.

EY’s report says robos changed how human advisors market themselves, interact with clients, optimize processes and develop investment strategies. Dave Nugent, chief investment officer at Wealthsimple, a robo advisor, says because the platforms offer both front- and back-office support, it’s allowed more advisors to become independent.

Monetizing Business

An emerging trend Nugent says he’s noticed as advisors start thinking of their own retirement is how robos can help them monetize their business as they contemplate a transition legacy.

“One of the biggest challenges historically has been to actually onboard a [client’s] book after acquisition … because there’s just so much repapering that has to get done,” Nugent said. “Creating those efficiencies is allowing advisors who hadn’t necessarily thought of buying a book to now do it more easily.”

Jason Preti, certified financial planner at Unleashed Financial, says his niche is younger clients who have smaller amounts to invest, and he uses the Betterment platform to advise them: “It opens up global diversification to somebody who has less than $100 to actually put to work today.”

Helping Investors
The robos help keep smaller investors in the market and diversified, Rosenbluth says.

“They have a strong suite of products and asset allocation strategies that leverage ETFs, usually from one to two fund families, rather than people having to build these themselves,” he noted.

The asset allocation models are built for strategy, rather than as tactical models, and investors who use them tend to stay put, rather than shifting from one model to another. That “stickiness,” as Rosenbluth calls it, likely keeps these investors from darting in and out of the market.

Preti says he hopes that by targeting smaller—often-younger—clients, they’ll stick with him as their wealth grows, an idea he got after working with retirees who had multimillion-dollar portfolios: “They didn’t just wake up with it. I wanted to work with people who could make the early decisions that grow and create wealth without having a CEO job.”

Uniform Management

Batcha’s firm uses a number of different technology platforms and outsources asset management for independent hybrid broker-dealer registered investment advisory firms and for financial planning firms. The platforms allow them to manage portfolios uniformly and at scale cheaply and easier, something they couldn’t do without that technological backing.  “Otherwise it’s messy,” he said.

The type of service is stratified at different asset levels, he notes. For the minimum fee, there may be one conversation yearly with clients, who otherwise can access someone online, similar to how the wire houses use robos, such as Merrill Edge.

Aside from allowing advisors to scale their business, it can also help with tax-efficient rebalancing and creating portfolios that are more flexible.

Nugent says that as advisors focus on personalization, the technology can help to spot client habits by mapping patterns such as when they log on and how they visit their portfolio page. That allows advisors to build rules and a communication strategy around those patterns.

In volatile times, like in late 2018, combining the efficiency of robos with human advice makes a difference, as it’s easy for an investor to become impatient or emotional with investing, Batcha says.

“People are their own worst enemy, and they do the wrong thing at the wrong time,” he said. “It’s another reason why it’s important to combine the technology with advice.”



Debbie Carlson focuses on investing and the advisor space for U.S. News. She is an internationally published journalist with bylines in publications including Barron's, Chicago Tribune, The Guardian, Financial Advisor, ETF Report, MarketWatch, Reuters, The Wall Street Journal and others.