Automated investing services, known as robo advisers, are a cause célèbre for many in the financial planning world. How should registered investment advisers respond? Positively, industry professionals say.
“I think registered investment advisers should embrace robo advisers as not only inevitable but in some ways beneficial to the customers they serve,” says Tom Fredrickson, a financial adviser based in Brooklyn, New York. “What are robo advisers but a faster, more accurate method of data analysis and management than human beings can execute?”
A survey commissioned by Jefferson National, a Louisville, Kentucky–based firm that offers investment programs to RIAs, shows that the highest-earning human advisers are the most proactive in adopting new technology, including robo advisory services. “The most-successful advisers understand that, rather than a threat, robo advisers are in fact an important part of a comprehensive offering,” says Jefferson National CEO Mitchell Caplan. He and other financial advisers stress, however, that robo advisers don’t eliminate the need for human advisers, who — unlike an app — offer a nuanced take on a client’s needs.
“Many clients will still want and need the human touch to get going and stay the course,” Fredrickson says.
As of year-end 2014, 11 of the largest robo advisers managed or advised on $19 billion in assets, up from $11.5 billion eight months earlier, according to research firm Corporate Insight. Analysts at consulting firm A.T. Kearney estimate that by 2020 robo advisers will manage about $2 trillion. Presently robo advisers have about $30 billion in assets under management, according to A.T. Kearney.
Robo advisers attract customers and invest for them via websites. Investors begin by responding to a few questions concerning their age, investment aims, risk parameters and current wealth. After crunching the answers the robo adviser offers a portfolio of exchange-traded funds, which, if the client accepts, are then purchased and managed. The fees generally come to about 0.25 percent of an investor’s assets per year for the robo adviser and an additional 0.1 to 0.25 percent for each ETF. That puts the total fee paid by investors at 0.35 to 0.50 percent.
“Robo advisers will put fee pressure on human advisers,” says Kenneth Landgraf, president of Kenjol Capital Management, a wealth management firm in Austin, Texas. “For someone who wants a pure low-cost adviser, there you go.” But for someone with $500,000 or more in assets, an investment program based on answers to a smattering of questions likely won’t work well, he adds.
Surprisingly, however, the Jefferson National study found that 52 percent of advisers who currently deploy robo services say they use them most often for clients with portfolios of more than $1 million; 20 percent say they use them most often for clients with more than $10 million.
Another counterintuitive finding in the survey is that millennials don’t dominate the client ranks of advisers who use robo services. A total of 49 percent of financial advisers use robo services for baby boomer clients, the same percentage as for millennial clients. So how should RIAs incorporate robo advisers into their practices? Companies such as robo adviser Jemstep provide automated investment services that human advisers can use on behalf of their clients. Advisers are allowed to present the services as their own.
The automated services would be particularly useful for less complex smaller accounts, which are not cost-efficient for advisers to spend a lot of time on, says Tricia Rothschild, head of global adviser solutions at Morningstar in Chicago. “Investors themselves can do it through a client portal,” she says. The program could include automatic portfolio rebalancing. “Then the adviser can provide higher-touch service as warranted — behavioral coaching, discussion of trade-offs and choices clients have as their situations change,” she adds. Rothschild says robo services can help with generational wealth transfer. And robo advisers can help RIAs expand their business by opening the door to a new — often younger — client who might feel more comfortable signing up for an app than cold-calling a human financial planner.
One tricky issue for advisers using automated services will be explaining their fees, Rothschild says. If advisers charge only 40 basis points a year for accounts run by robo advisers, they may have trouble explaining why their full-service clients have to pay 100 basis points. “Advisers must make clear to investors the distinctions between the models,” she says.
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