Three Reasons why Robo-Advisors are a Huge Benefit to the Advisory Profession

Bob Veres

It’s time to change our thinking about the so-called robo-advisory firms that are moving into the financial planning landscape.  They are going to be far more beneficial to the planning/investment advisory profession than any innovation in recent decades.

Of course, the initial response was that the online investment services represented a mortal threat to advisory practices, because (it was argued) they undercut the pricing structure of the AUM service model.  Why pay 100 basis points for portfolio management when you can pay 25?  Ignored in the initial panic was the fact (confirmed in my industry presentations when I polled large audiences of advisors) that no advisory firm has yet reported losing any clients to the robo-competition.  (If you have evidence to the contrary, please send me a note.) 

If you’re not losing any clients, then what is the real impact of these online platforms with their fancy technology and lower pricing?  Let’s explore three ways these firms are changing the planning ecology, and note that all of them are not just positive, but significantly positive.

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  1. Robo-advisory firms are expanding the market for investment advice

If the online investment platforms aren’t taking clients from the planning and investment advisory community, then where are they getting the $16 billion in assets ascribed to them by NY-based Corporate Insight? 

The obvious answer is that most of that money is “new money” from people who have not purchased investment advice in the past.  This, of course, makes sense; people who might not be inclined to pay 1% of their assets, or who can’t meet a $500,000 minimum, or who aren’t comfortable in a delegator role, are going to see Wealthfront as a less expensive alternative where they have more control over their portfolio management.  This suggests that many thousands of people are getting their first taste of professionally-managed portfolios.  They’re in the early stages of becoming potential advisory clients.

One can safely speculate about the outcome.  As non-wealthy customers accumulate more assets, they will inevitably start asking questions that an online service provider can’t answer, related to planned giving and estate planning, IRA rollovers, Roth conversions and, most basically, whether they can afford to retire or switch careers to something less demanding and stressful.  At that point, they may be inclined to ask a professional (human) advisor for guidance, leading to a larger pool of prospective clients in the future.

The online investment services are not unaware of this potential for clients to migrate from a non-sticky low-advice model to comprehensive planning firms.  Personal Capital and LearnVest already incorporate financial advisory services. At different ends of the cost spectrum, Edelman Financial and Vanguard’s online platform were both built with on-call advisors in the loop.  Others will follow suit.  “We intend to add financial planning tools in Version 2 or 3, so we can link financial plans to the portfolios and create an end-to-end solution,” says Steve Lockshin, founder of B+ Institutional Services, which is the distributor of Betterment Institutional to the advisor community.