Five Ways Robo-advisors Will Change the Way Advisors Work

by Raef Lee, 10/15/13

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Even the name robo-advisor is derisive. It evokes an image that is uncaring, lacks humanity and is inflexible. But it is the term being used by advisors to describe a new breed of startups that directly connect tech-savvy investors with suites of analytic tools to create financial plans or investment portfolios.

A name this disparaging makes us ask why advisors fear this new model of financial advice.

To answer that question, let’s look first at the three types of robo-advisor:

Pure technology websites, devoid of advisors, that allow investors to do everything themselves (such as Motif Investing and Jemstep)
Companies that include advisors who only communicate with their clients online (such as Personal Capital and Learnvest)
Established financial service companies that have recently expanded their online advice offerings (such as Vanguard and Edelman Online)

FUD

Recent news about these companies has spurred fear, uncertainty and doubt (FUD). The Wall Street Journal did a detailed piece focusing on the cost of robo-advisor services. Finovate highlighted the venture funding behind these companies.

Whether you think robo-advisors are the latest fad that will go away or a vision of how financial advice will be given in the future, they will definitely disrupt and change the way that advisors interact with their clients.

What it means for you

In our research and discussions with advisors, these are the ways that robo-advisors are most likely to impact you:

Increased fee pressure: Robo-advisors offer lower fees than traditional advisory practices do for technology-centric services. This will set an expectation for lower fees, especially for younger investors.
A call for transparency: Investors will want more transparent fee structures. The emerging robo-advisor model charges a fixed fee for lower assets (say, under $100,000) and a basis point fee for larger assets (where the services provided are broader).
Pressure to accommodate a younger generation: Robo-advisors will reach a younger, tech-savvy, growth-accumulating generation who will continue taking advice from the same source as they grow wealthier.
More technology: Investors will increasingly demand that they interact with the advisor in the way they choose. This will include web conferencing, the ability to schedule time with an advisor online and intuitive ways of working on documents together.
Access to comparative data: Investors want information about how they are doing compared to their peers, and they want their advisors to present other views (both expert and non-expert) on investment-related subjects. Comparative data allows the investor to be better informed in financial decision-making.

Robo-advisor overview

These are early days for robo-advisors. The market is new, and there are many entrants and business models are being tried. Here’s a depiction of the current landscape:

Note that:

As more in-person advisor time is used and there is more investment management (bottom left quadrant), the fees rise. When more technology is used (top two quadrants), the fees decrease.
Nearly all these companies are private. Most are venture-funded and were founded less than five years ago.
The cost of service ranges from 200 basis points (Edelman Online for assets under $150,000) to zero (SigFig). But very different services are included in the costs. One of the most interesting aspects of these companies is that their fees are transparent and clearly identified on their websites.

Across the pond

I talked to Ian McKenna, lead futurologist (I see a new title in my future) at the Finance & Technology Research Center (F&TRC) and writer for the influential British MoneyMarketing publication. He has researched the new companies in both the U.K. and the U.S. McKenna commented, “Only a handful of advice firms in the U.K. are embracing digital as an advice-delivery mechanism, due to the more restrictive regulatory environment. However, we are now tracking over 20 highly innovative next-generation advice services across America, which look destined to make high-quality advice and guidance accessible to vast numbers of Americans who would previously have found such services unaffordable. ”

All this concern about robo-advisors brought me back to my favorite way of scaring myself growing up: watching Dr. Who. I would hide behind the couch as the good doctor and his faithful sidekick would battle the latest threat to civilization. The scariest villain? The Cybermen. It looks like I haven’t progressed much…

What next?

So should advisors be afraid? Robo-advisors will probably succeed in a new market that has largely been ignored by advisors – young, high-income portfolio accumulators. Until now, advisors have not bothered going after clients with little money. Technology-centric solutions will make this client segment profitable.

Advisors need not be nervous as long as they embrace the increased use of technology and social media that clients will increasingly expect in their advisor communications. Succession planning must also include younger advisors who look like and connect with the next client generation.

Raef Lee is managing director for the SEI Advisor Network. In addition to writing tips for advisors on technology, Raef is responsible for exploring new services and markets for the SEI Advisor Network. Connect with him on LinkedIn now or follow him on Twitter: @SEIRaefL.

Five Ways Robo-advisors Will Change the Way Advisors Work

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