Strange Bedfellows: Advisors & Robos

November 04, 2015

[This article originally appeared in our November issue of ETF Report.]

There’s much soul searching in the financial advice industry these days. What will its future look like?

Thanks to a leap in financial technology, largely at the hands of robo advisors, traditional advisors today are faced with a changing relationship with investors, who have come to expect—if not demand—more for less.

They are also faced with a business model anchored on spreadsheets, faxed paperwork and quarterly reports that are starting to look more and more obsolete in the era of high-tech investment solutions, particularly in the eyes of younger generations of investors.

The robo phenomenon, or the technology advancement it represents, is indeed pushing many advisors out of their comfort zone in order to adapt.

To quote Dean Zayed, founder and CEO of Brookstone Capital Management—one of the fastest-growing RIAs today, with some 300 advisors on its platform, “We know we want to embrace technology; we can’t ignore it. Technology is a common thread of all of our strategic planning today.”

So what are advisors doing exactly? The answer to that question is taking many interesting shapes.

If You Can’t Beat Them, Join Them
Some advisors are joining forces with robos in partnerships that delegate investment management entirely to an automated solution, but preserve the human element of financial advice.

For example, consider what Sophia Bera has created. A registered investment advisor herself, she built her firm centered on two beliefs. First, that many investors need or want financial guidance. Secondly, that bells and whistles and expensive portfolio solutions seldom deliver the goods at the end of the rainbow. Instead, she believes, low-cost passive investing with ETFs is the better way to go.

The result is Gen Y Planning, a Minneapolis-based RIA she launched in 2013 that blends what Bera considers the best of both worlds. She charges 95 basis to manage assets for her clients through Betterment, of which, Betterment keeps 25 bps.

“The platform is a game changer for our profession when it comes to serving next-generation clients,” Bera said. “I’m a big fan of passive investment approaches. Even if I would have had the resources to hire an amazing fund manager to run portfolios for me, I’m not swayed by the research I’m seeing that that would be the best idea for my clients.”

The partnership benefits both sides, really.

It allows Bera—and advisors like her—to deliver what her clients need in terms of portfolio management, and to meet their financial planning needs as well, which is her strength. We are talking about needs that go beyond investment management, such as life insurance, estate planning, student loan repayment, etc.

Betterment has been a particularly good fit for this type of model because the firm is not built as an advisor sitting on top of someone else’s broker-dealer. Betterment is also the broker-dealer, which means as a partner, it’s offering the entire solution, handling all aspects involved with investment management.

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