Strange Bedfellows: Advisors & Robos

November 04, 2015

To Complement, Not To Compete
One of the challenges of this evolving business model is making sure that robolike solutions don’t undermine advisors within a practice.

That fine line is exactly what Brookstone’s Zayed has been focusing on. His firm is looking to develop something in-house that would “complement and not compete” with their 300-or-so advisors.

“To be perfectly honest, we haven’t made any final decision on how we’re going to roll it out. But we know we want to embrace technology, we can’t ignore it,” Zayed said. “Robo is code for technology. You need to have technology that enables you to be able to provide online-type advice today.”

To make it work, he’s serious about having a clear value proposition that goes beyond robolike portfolio management solutions. That value comes in the form of a network of advisors that are fiduciaries first and foremost. Moreover, Brookstone is also bringing to the table a “unique investment philosophy” that involves a blend of different risk-managed strategies, a tactical sensibility, if you will.

“Not to knock on current robos, but they typically offer plain-vanilla asset allocation models,” Zayed noted. “We believe we have more of the pieces that are more sustainable long term, i.e., we marry the technology with the live fiduciary advisor and more sophisticated investment portfolios.”

“We’re not quite sure how to do it yet, but we know it’s going to be a lower-cost offering, and it will be done in a way that complements our advisor and not competes with them,” he added.

ETF Issuers In The Mix
It’s unclear how large advisory shops/ETF issuers are pulling off this delicate balance.

Think of Schwab. That’s a firm that has a vast network of advisors—and a quickly growing one, too. But now, Schwab also offers robo services that target retail customers as well as advisors.

If the Schwab Institutional Intelligent Portfolios is a customizable robo platform that puts high-tech portfolio management solutions at advisors’ fingertips, the Schwab Intelligent Portfolios platform is a bona fide robo advisory vying for retail client assets.

The platform builds and manages portfolios for individual investors with no fees or commissions. It’s a do-it-yourself solution that goes head-to-head with the likes of Wealthfront and Betterment’s retail platform—the same robos that have often been portrayed as a threat to the traditional advisory business.

Is it a contentious relationship between Schwab advisors and Schwab’s retail-focused robo? Probably so, although Schwab isn’t talking about it.

Self-Competition?
“It’s a little bit contentious,” Kitces, who studies the space, offered. “But it’s always been. Schwab is building private client services, and it also has advisors. They are competing with their own advisors.”

The reason it all works, in the end, is that Schwab is also building products. It’s an ETF issuer. So creating robo channels is a way of creating an additional distribution channel for its ETF products.

Whether it’s through its advisors, its retail robo or its institutional robo as partner to their advisors, the end result is largely the same: Schwab ETFs are being sold.

That’s probably the same impetus behind BlackRock’s recent move to acquire FutureAdvisor for $150 million this past summer—to use it as yet another distribution channel for iShares’ ETFs.

FutureAdvisor’s co-founder and CEO Bo Lu said that at the time of transaction his firm’s mission would remain the same, and it would continue to offer investors automated portfolio solutions centered on the “best products available.” BlackRock, in turn, said it plans to have FutureAdvisor become a robo unit within the company, targeting institutional investors and advisors specifically.

“For years, we’ve used BlackRock’s iShares ETFs together with products from other fund families,” Lu said on the company’s website. “We will continue to have an open platform that uses products from a range of providers. As always, we will make the best choices for you, our clients, in our role as a fiduciary of your assets.”

The ink is still drying on the deal, which should close in the fourth quarter. But many in this industry are already anticipating BlackRock’s newly acquired robo unit will be yet another distribution platform for the company’s products.

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