Financial advisers need to have a strategy to deal with the advent of robo advisers

Not all robo advisers are created alike. In fact, there’s a wide disparity between them, according to Joel Bruckenstein, publisher of T3 Technology Hub, one of four experts who participated in a MarketWatch panel discussion on the topic in Boston on April 5. “And I’m not sure it’s well understood by the public or advisers yet.”

The good news is that financial advisers and investors in general can pick and choose what type of robo advice with which to work. “At one end of the spectrum you have the rock bottom (robo adviser), which is where you are going to get an asset allocation that’s pre-determined for you, which may or may not have rebalancing or tax-efficient rebalancing, but it’s going to be very cheap. It’s going to be funded by ETFs that are also very cheap, and your all-in cost will be really minimal,” Bruckenstein said during the panel discussion. “And at the higher end, you may have some smart-beta ETFs that cost more. You may have some more bells and whistles in there as far as different strategies for trading.”

The threat of robo advisers that offer financial planning

Bruckenstein also noted during the panel discussion that robo advisers are starting to add basic financial planning to their offerings, and that could be a threat to financial/investment advisers. “It’s not just, ‘here’s the question, and here’s your risk tolerance, let’s put you in a portfolio,’ but maybe some goals-based planning wrapped around that,” said Bruckenstein.

How much of a threat is, of course, open to debate. Many advisers have argued that investment advice, basic asset allocation, is a commodity, and thus robo advice is not a threat to them because they — advisers — provide “life and longevity planning on top of investment advice,” Bruckenstein said.

Still, advisers will soon have to focus on the value proposition given that “financial planning is starting to creep” into robo advisers, Bruckenstein said. “Advisers have to up their game,” he said. “I’m not a pessimist. I think everybody can be very successful if they have a strategy and if they implement successfully. But the point is if you don’t do anything and you bury your head in the sand, then I think you are at risk.”

How might advisers add value? According to Bruckenstein, the real value that human advisers add is behavioral finance. “If you look at the numbers, and the numbers have been published for years by Morningstar and others, the general public doesn’t even get the returns of the funds they invest in,” he said. “It’s roughly 350 basis points less than they should get. That’s because they are always buying high and selling low. So, just being able to help people understand their behavioral biases and fight against them delivers a few hundred basis points of return and I don’t think that’s going away tomorrow.”

For his part, Tim Welsh, president and founder of Nexus Strategy, suggested that one problem advisers face is the asset management fee. “We’re tying the revenues that the advisory charges to the portfolio itself which then brings the focus back to running the money, the investments, the portfolio management which we’re now seeing commoditized to zero,” he said. “What effectively the robos have done is unbundled the advice component from the asset management fee. So, now everyone is going to have to try to figure out ‘how do I communicate my value add, what am I really offering and how am I being compensated for it.’“

Welsh noted that the advice profession/industry is starting to see new revenue models emerge such as retainer fees, project fees and those more like attorney-model retainer fees. Why? Because clients who are charged a fee based on assets under management might be surprised to learn they are paying, for instance, 100 basis points on a $1 million portfolio, or $10,000, and say: “that’s more than I pay for a lot of things in my life,” Welsh said.

Like Bruckenstein, Welsh said advisers will have to focus on their value proposition in this brave new world of robo advisers. “And are we as an industry positioning the financial advice, the behavioral guidance all those great things that advisers do in terms of what the actual deliverable is?” Welsh asked.

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