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.

The Need For Scale
To Betterment, partnerships with advisors such as Bera are a great way to more quickly scale their business. Robos may be the cool kids on the block right now, but they too have to spend time and marketing effort to attract clients like any other RIA. And that’s not an easy task.

Strange Bedfellows Robos and Advisors

“Partnerships enable as many people as possible to use our platform,” said Joe Ziemer, business development and communications head at Betterment. “One of the benefits is scale.”

Scale to a pure-robo is critical if you consider that the primary target audience in the robo space—the younger generation of investors—isn’t exactly where the bulk of the wealth is.

As Michael Kitces, partner and director of research for Pinnacle Advisory Group, who publishes the financial planning industry blog Nerd’s Eye View puts it, “Technology is not unique to millennials at all. Robos went after millennials because if they went after baby boomers, they’d go against 1,000 other firms that are already competing in the space.”

“There’s not that much competition in millennials because accounts are so small, so it’s not really that profitable,” Kitces said. “They need scale.”

There are already 200 advisors partnering with Betterment’s institutional platform, which is barely 1 year old.

And the path to scale has been an interesting one to the extent that each of these advisor partners has found their own versions of a perfect balance between the human and robo worlds.

Different Uses Of A Robo
“There are larger firms that use this as a segmentation strategy that allows them to take clients with smaller assets,” Ziemer said. “There are also firms that use this for lifestyle implementation—people who want the high-tech experience. And there are those who are using it for everything, putting all clients in it.”

If nothing else, some advisors have even found that joining forces with a robo is a great way to recruit new advisor talent to their firms.

“This is an aging industry,” Ziemer said. “The average age of advisors today is 54 or 55, and we are at record lows of people entering the space. Some advisors are telling us that to attract young good talent, good technology makes sense.”

Creating Your Own Solution
Many advisors are going a different route. They’re looking to replicate the user-friendly, low-cost experience robos are known to provide in-house. This means developing their own types of digital investment solutions to make online-type advice and online investing a reality in their own shops.

Atlanta-based Wela Strategies, for instance, did its homework, raised some capital and upgraded its offering to a new digital unit designed to tap in to this growing demand for tech-savvy solutions. The result was the creation of yourwela.com.

“You can log in and use Wela for free, aggregate your accounts, digest our content, use our tools, etc., but if you want to invest with us, it’s the same fee schedule [as before],” Mitch Reiner, managing partner at Wela Strategies, said. Fees here range from 0.75% to 1% depending on the account size. The larger the account, the smaller the fee, and anything above $1 million is on a per-case basis, according to the company’s website.

To Reiner, creating a solution instead of partnering up with a robo made sense given the market he serves. In Atlanta and surrounding areas, he says, few clients, if any, have heard of Betterment or Wealthfront—the big robos today. Meanwhile, Reiner, and Wela, have a strong following—and even a radio presence—in the region.

“There was an opportunity here for us,” he said.

Strange Bedfellows Robos and Advisors

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.

Vanguard: The Real ‘Cyborg’ Threat
Let’s also not forget what Vanguard has been doing. In true Vanguard fashion, the firm is pioneering in a pioneer space, offering a unique take on the technology theme with an offering that’s part robo, part human.

The robo initiative here, Personal Advisor Services, includes an office staffed with 100-or-so financial professionals, but the interaction is done virtually, not in person. And portfolio management is high tech. They are using a lot of technology solutions, but are still offering human-based advice customized to clients.

“Vanguard is the most disruptive of all of these solutions because it competes with human advisors, and it does it at a robo price point of 0.3 percent,” Kitces said. “They are frankly the biggest threat to both worlds—they offer more value than a robo for the robo price, and offer as much value as a financial advisor at a fraction of the price.”

Strange Bedfellows Robos and Advisors

“But [Vanguard] is not really a robo even though it’s been characterized that way,” he added. “They’re really a hybrid—I like to call them cyborgs—and cyborgs are doing much better than either robos or advisors.”

Why This All Matters: Technology
At the core of the transformation taking hold across the advisory industry is a realization that in order to attract new—younger—clients, there needs to be a change in the delivery mechanism of advice and investment solutions.

But pursuing innovation can’t be done by losing sight of the fact that there’s no such thing as a generational divide when it comes to better technology. Everyone wants better tools and everybody uses technology.

The largest pure-robo advisors combined have total assets of maybe $6 billion—a miniscule fraction of the overall investment universe today.

“The need for face-to-face consultative relationships is not going to go away,” said Steve Blumenthal, head of CMG Capital Management Group. “To focus on creating a robo platform to capture the millennial generation is ignoring the 98% of where the wealth is.”

“The technology within the robo construct is what’s valuable to all advisors,” he said. “Our industry needs to get simplified that way, and make that experience better. The future is technology; it’s not robo.”

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