How to overcome the robo threat

New tools and competitors are forcing advisers to more clearly define the value they provide to clients.
By Guest |  23-10-17 | 
No Image
About the Author
Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

This post by certified financial planner Ben Brown first appeared on Morningstar Advisor site.

Since the 2008 financial crisis, multiple innovative technology companies have been challenging the investment advisory status quo with direct-to-consumer automated investment services, typically for a price much lower than traditional investment advisors. Not surprisingly, the initial growth of these companies and the assets they manage, combined with the launch of automated offerings from established firms like Vanguard, has fueled significant concern among advisors. And it wasn't too long ago that many industry pundits were hailing automated or robo-advisers as the future of investment management--and the end of traditional human financial advice as we know it.

Yet the evolution of these automated services over the past five years--both in terms of the breadth of their varied fee and advice models, as well as their growth with regard to total assets managed-- indicates they've become less of a pure threat to traditional human investment advice. Instead, they represent the continued emergence of disruptive technology within the financial services industry that forces advisers to both adopt new technologies and clearly define the value they provide to clients above and beyond simple asset allocation.

The Current Automated Advice Landscape

While the rhetoric surrounding automated advice typically pits software versus human advisers, the line between robo-advisers and traditional human advisers is becoming increasingly blurred, as automated services incorporate more human advice and traditional advisers adopt new technologies.

On the pure robo-adviser end of the scale stand companies like Wealthfront, charging an annual fee of only 0.25% of assets managed. Betterment, Wealthfront's largest competitor, charges the same 0.25% AUM fee for their basic service, while also offering a "premium" service model for a 0.40% fee (and $100,000 account minimum) that provides investors with access to a human investment adviser. Smaller players such as FutureAdvisor, SigFig, Canadian startup Wealthsimple, and others all charge similar or higher fees with varying levels of access to human financial advice depending on the fee, investor account size, or both. The focus for companies on this end of the advice scale is typically a technology-first approach to investment advice, with limited or no human interaction.

Bridging the gap between these primarily automated solutions and more traditional human advisers are companies like Personal Capital and Vanguard's Personal Advisor Services. While still relying on cutting-edge technology and an online experience, these "hybrid" advisers emphasize a personal relationship with an investment adviser and the importance of creating a financial plan just as much (if not more) than they emphasize the power of their technology. Though their levels of service, breadth of advice, and fees vary (from Personal Capital's tiered fee starting at 0.89% of assets managed to Vanguard's rock-bottom fee of only 0.30% of assets managed), these services represent much more of a direct challenge to the traditional investment advisor given that they are mass-market "technology-first" advisers as opposed to pure robo-advisers.

Lastly, and perhaps in their own category of automated advice, are B2B technology companies catering specifically to traditional advisors by creating tools that allow them to harness some of the same automation powers of direct-to-consumer robo-advisers. Often less well-known due to their substantially smaller marketing budgets (given that they aren't usually competing directly for consumer assets), companies like RobustWealth, NextCapital, and others are creating innovative ways for large, established industry players and even solo advisers to automate and/or improve their investment management operations, typically for a low, asset-based fee. Even Betterment, which began as a pure direct-to-consumer robo-adviser, offers its own institutional platform (Betterment for Advisors).

The Commoditization of Investment Advice?

Though it remains to be seen if primarily direct-to-consumer robo-advice companies like Wealthfront and Betterment can achieve sustainable growth and profitability, the evolution of automated advice platforms over the past five years presents us with a simple truth: the basic aspects of traditional investment management such as asset allocation, security selection, and portfolio rebalancing are being (or have already been) commoditized by software. Further, the fee level on which these technology companies and platforms have converged for these services is roughly 0.25%, which is significantly less than the traditional investment adviser AUM fee.

Notable, however, is the success of hybrid solutions that are combining human advisers with investment automation technology. Earlier this year, Wealthfront was managing approximately $6.7 billion in client assets, compared to approximately $10 billlion in assets managed by Betterment (a platform with both a premium, human-adviser-focused offering and an institutional platform built specifically for existing human advisors). While Personal Capital lags in AUM at only $4.3 billion, it is most likely still leading Wealthfront and Betterment in revenue due to higher fees, and can boast a significantly higher average account size. In a league of its own, Vanguard's Personal Advisor Services has an astounding $51 billion in assets under management as of December 2016 (with recent reports suggesting this figure has grown to nearly $83 billion).

While these are admittedly limited data points, it isn't difficult to conclude that investors still value a human relationship when seeking financial advice, particularly when considering the ever-increasing emphasis that automated advice solutions are putting on a human adviser relationship, the recent acquisition of several robo-advisors by traditional industry players, and our own experience as advisers.

Questioning Your Value

Now more than ever, traditional (human) advisers need to both clearly define and effectively communicate the value they provide to current and potential clients. If there is a silver lining in the emergence and growth of automated investment advice, it is the acceleration of the need for advisers to improve their technology platforms to provide clients with a better investing experience. Further, the convergence on a roughly 0.25% asset-based fee for the increasingly commoditized aspects of investment management serves as a baseline to help advisors more effectively structure their fees and assess the value of their service offerings.

For many financial planners and wealth managers charging asset-based fees that include both investment management and financial planning services, the value provided to clients beyond the 0.25% AUM fee level may seem self-evident. However, this value isn't always so easily perceived by clients, particularly when they’re being bombarded with advertising from venture-capital-backed technology companies claiming to offer the same services or better.  (For example, Wealthfront's website recently claimed that "Financial planning and investing with Wealthfront couldn't be easier," despite no interaction with a human adviser.) What are the specific planning services clients can expect from you? And when can they expect them? Is information about your planning services easily accessible to both existing and potential clients? And is it prominently displayed on your website and clearly communicated through all of your marketing channels?

The same is true for advisers focused exclusively on investment management, though communicating additional value provided to client portfolios beyond a low-cost automated solution is increasingly difficult compared to outlining additional financial planning services that automated services clearly don't provide. Mere access to a human financial adviser is worth a premium above the 0.25% AUM fee level, as evidenced by Betterment's premium service offering for a higher 0.40% fee and $100,000 account minimum, Vanguard's 0.30% fee and $50,000 account minimum, as well as Personal Capital's more traditional tiered AUM fee schedule starting at 0.89% (though Personal Capital is designed to offer financial planning services as part of that fee). Further, adviser credentials also play a role in pricing, considering Betterment's premium service guarantees access to a CFP professional, and Personal Capital provides priority access to a CFP advisor if you meet the $1 million account minimum for their "private client" offering.

Even so, if you aren't providing financial planning or other wealth management services to clients as part of your advisory fee (or if you charge separately for asset management), what value are you adding to client portfolios that isn't already available for a lower cost elsewhere? Are you employing strategies that can't or haven't yet been automated? Either your pricing should be set more closely to the baseline established by the automated services, or the answer(s) to the above questions should be well-defined and clearly and frequently communicated to both current and potential clients.

Ben Brown is a certified financial planner and an IRS enrolled agent. He is the founder of Entelechy, a fee-only financial planning and investment management firm based in Bethesda, Maryland, serving clients in the Washington, D.C., area and nationally.

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools
Ask Morningstar