Ready or not, the age of the robo-advisor is at hand. Algorithm-driven, automated, online portfolio management is expected to handle $2.2 TRILLION IN ASSETS BY 2020 in the United States. That is up from an estimated $50 billion in 2015, according to information provided by Bloomberg. Is this breathtaking trend a threat or an opportunity for independent financial advisors? After all, robo-advisors do the same things as humans but cost a lot less, right? No so fast.
There is little doubt that robo-advisors have changed the financial services industry. Like most innovations, this one emerged to address a gap in the marketplace. As Bloomberg noted in its June 2016 article “The startups that launched the industry said the rise of robo-advisers would both disrupt the $20 trillion field and give millions of investors access to the kind of smarts only the well-to-do have been able to afford.”
Fees Are Up – Not Down
The robo-advisor fee structure, as low as .25 percent of Assets Under Management (AUM), has affected the broader industry. But perhaps in unexpected ways. Industry analyst MICHAEL KITCES found that instead of AUM fee compression, the average advisory fee actually increased in 2016. Analyzing a study from FA Insight, he also found evidence that the industry re-invested in both people and technology in 2015, a year marked by slowing growth as measured by both Assets Under Management (AUM) and number of clients.
“Or stated more simply, robo-advisors aren’t causing AUM fee compression, but they are causing at least a near-term profit squeeze, as advisors reinvest into technology and professional financial planning staff to compete and offer more, and then raise their prices to better match the services they’re (now) offering,” Kitces wrote.
Even the moniker “robo-advisor” probably does not accurately describe the tasks this technology is most likely to perform. Rather than providing advice, the technology most of the time provides automated portfolio management by allocating investments within various asset classes. That distinction is not lost on industry-watchers who are beginning to understand the technology will actually enhance client service and improve efficiency, rather than drive independent financial advisors out of business.
“There’s no question in my mind that rather than posing a threat to independent advisors, the so called robo-advisors will become as ubiquitous in advisory firms as spreadsheets. They’ll provide solutions for common problems from what to do with smaller clients who can’t afford or justify traditional portfolio management, to reducing the time/cost of all portfolio management,” wrote Bob Clark Editor-at-Large Investment Advisor Magazine for THINKADVISOR IN AUGUST 2016.
High-Net-Worth Investors Want Automated Wealth Technology
It is also worth noting that wealthy individuals want their financial advisors to have technology in their tool box. BUSINESS INSIDER reported findings from a MyPrivateBanking survey showing high-net-worth investors are adapting automated wealth technology more rapidly than those classified as mass affluent.
“More than 70% of overall respondents think that such tools can positively influence their wealth manager’s advice and decision-making process and that automated advice potentially speeds up onboarding processes such as registration and account opening, making these processes more efficient and convenient,” the August 2016 Business Insider article stated.
The Robo-movement will likely allow savvy independent financial advisors to provide higher levels of service and value to their customers. Technology can do the heavy-lifting of collecting data, allowing advisors more time to analyze opportunities and implement recommendations appropriate for a client’s particular (and very human) situation. Technology can’t do that. But independent financial advisors can.