A new generation of technology has some advisors worried about extinction
The robo advisor phenomenon is clearly gaining momentum across the industry, from the major brokerage firms and banks to standalone RIAs. As this new technology-driven model is becoming more prevalent, advisors are beginning to question the impact of the new trend on their ability to grow, to service clients and to remain competitive. For some, the robo advisor represents yet another source of competition and a potential threat to how an advisor’s contribution is valued. However, others will recognize the opportunities it creates: to gain wallet share and appeal to a new generation and/or type of client as well as to create a more scalable, replicable and profitable addition to the current way of doing business.
Who, or what, is a robo advisor?
The robo advisor refers to technology-based capabilities for providing investment and wealth management services. While some robos are being launched to stand on their own, without the need for a relationship with an actual advisor, we believe that the most successful robos will be those whose advanced technology is integrated into traditional investment and wealth management platforms and in the hands of flesh and blood advisors. These robos will not replace but enhance the advisor-client relationship.
For example, Sallie Krawchek has described her new robo platform Ellevest as a “digital investment platform” designed specifically for women. Her goal, in part, was to add a level of automation to creating financial and investing plans, while consequently better maximizing an advisor’s time. As she noted in an article on ThinkAdvisor.com, it’s not about replacing the human advisor, but rather about “leveraging the brainpower of humans through technology.”
What’s the catalyst for the robo movement?
No doubt that shrinking margins and fee compression have contributed to the development of the robo. The DOL rule and the overall shift towards a fiduciary philosophy are also creating a greater need for transparency with clients, including the question of costs. Advisors will more routinely need to disclose and justify their fee structures, conversations that can easily lead to having to explain the value that they provide. Those who focus solely on acting as portfolio managers without incorporating some planning or more holistic thinking are likely to feel the most threatened by the robo.
Is there a movement underway to replace human advisors with robo advisors?
The robo trend doesn’t signal the end of the industry as we know it. People generally need and seek out advice and guidance from trusted professionals. The support and concern that comes from a genuine relationship with a living and breathing advocate can’t be replicated by technology. Certainly, a robo can learn by algorithm, provided the information gathering process is comprehensive enough, but they cannot “experience” the client’s needs and goals the way a human advisor does. A robo can be helpful in formulating solutions, but not before a client’s needs and goals are heard and understood.
If you can’t beat ’em…
Barely a day goes by when the trade press doesn’t mention a new robo being launched, and all of the major firms are expected to offer some type of robo platform, if they haven’t done so already, in the coming year. So it’s inevitable that advisors and their clients will – one way or another – be interacting with the robos over time. Those who embrace rather than reject the idea of using a robo will prevail.
Next gen tools for next gen clients
Next gen clients are particularly intrigued by the robo platforms. They don’t necessarily want – nor fully trust – their father’s or grandfather’s advisor or firm. What it often takes to capture the millennial or next gen client market is new and innovative technology. Robo capabilities can be an effective and appropriate way to work with a client early in their careers or stage of wealth accumulation, and then be transitioned to a more full-service relationship as assets increase and circumstances become more complex.
Befriending the robo
Fear aside, this new breed of technology creates an opportunity for advisors to add more service and stay relevant. Consider this: All advisors, to some degree, search for ways to optimize their businesses and add capacity. High touch, service-oriented advisors benefit from incorporating technology solutions into their overall approach, allowing them to allocate their time in the most meaningful ways. Put another way, the robo can allow advisors to spend their time, on any given day, with those clients who require his personal attention while other tasks can be effectively handled in a “digital way”.
Advisors will need to incorporate – to some degree – this new breed of technology into their current investment and wealth management approaches if they are to remain relevant and stay competitive. Technology itself can’t replace the value of a personal relationship, and therefore can’t replace a financial advisor. The robo can, however, enhance the value of the advice an advisor provides, as well as maximize their time and capabilities. It’s not about win or lose. Clients won’t have to make a choice: They can have the reliability and innovation of the robo combined with the personal understanding of the advisor.
So to those advisors who see the robo as foe, think again. To steal a reference from pop culture, even the Robinson family on “Lost in Space” learned to embrace the Robot, finding their way through unchartered territory together.