It is almost impossible for advisers to go through a day without hearing how robo-advisers are shaking the foundation of their industry — and changing how their clients get financial advice. According to much of the industry commentary and media coverage, advisers should duck for cover and run for the hills in the face of an inevitable “robo-invasion.”
But the findings from
our recent Advisor Authority Study, commissioned by Jefferson National and conducted online by Harris Poll among more than 500 RIAs and fee-based advisers nationwide, show a very different reality. Rather than a threat, today's new generation of robo-advisers can be a valuable tool to help advisers grow their practice and better serve their clients. In fact, the most successful advisers understand that digital advisory solutions such as robo-advisers are an important part of a comprehensive offering.
A Different Reality
While many believe that robos are keeping advisers up at night, the findings from Advisor Authority show a very different reality. The study found that one-tenth of RIAs and fee-based advisers have never even heard of robo-advisers. Roughly one-third say they only know the term, and only one-quarter were very familiar with the robo-advice model.
Just as awareness is low, adoption is slow among advisers as a whole, according to the study. Of those advisers who are familiar with robo-advice, only one-third currently use any type of robo in their practice. Of those not currently using robo-advice, just 15% are very likely to integrate this model into their practice in the coming year.
(Related read: Robo-advisers go from a threat to a tool)
While this may seem surprising, the reality is that robo-advisers still make up a relatively small segment of the industry's total assets under management. Their share is projected to reach $55 billion to $60 billion by year-end 2015 in a wealth management market that is valued at more than $18 trillion, according to Aite Group.
Adding Value for Clients — and Growing Your Practice
Robo-advisers are not a new concept. Since the advent of the Internet, technology has been used to disintermediate the entire value chain in financial services. Over the years, there have been many digital financial solutions that could be considered the first incarnation of robo-advisers, including online brokers such as ETrade, Schwab and Fidelity.
Many of these companies developed low-cost online tools to help self-directed investors build and accumulate wealth for the future. Today, we're seeing the next generation of robo-advisers, such as Wealthfront and Betterment, which have moved beyond basic investing and trading tools to providing an automated process for risk profile assessment, portfolio allocation and regular rebalancing.
(More insight: Big firms blow past startups in robo race)
Many advisers simply view robo-advice as a solution for younger clients with lower assets under management. After all, a low-cost, fully automated portfolio allocation tool with lower minimum investment requirements provides obvious benefits for emerging investors looking to make their first move into the market. By keeping costs low and creating greater efficiencies, robo-advice can help these younger clients build more wealth more quickly.
Over time, as these clients accumulate more wealth, their financial needs become more complex. They will ultimately require your guided advice and a more sophisticated wealth management approach. In this way, robo-advice can be an effective solution for growing your practice.
A Tool for Top Advisers — and HNW Clients
Beyond serving entry-level investors, robo-advice can provide powerful solutions at any point in the investing cycle, as shown clearly by our study. Top advisers are more likely to be familiar with robo-advisers and more likely to be early adopters than their counterparts. For example, the study found that 43% of high-earning advisers and 47% of advisers with high AUM say they are extremely or very familiar with the model, compared to 25% of advisers overall.
More than half of the early adopters using robo-advice report that they use it for clients with more than $1 million in investible assets—and a full 20% say that they use it most often for clients with over $10 million in investible assets.
Given that clients with more assets have more complex financial profiles, it is likely that robo-advice would be used for only the portion of their portfolio that is low-cost and buy and hold, with regular rebalancing. This would be part of a more sophisticated portfolio that could include alternative assets and tactically managed investments—and part of a more holistic financial plan that includes such services as risk management, tax strategies, estate planning, legacy planning and charitable giving.
Know Your Robos
Our study shows that the most successful advisers are “tech-obsessed.” For example, advisers who manage more AUM spend more on technology—and use more technology—to make their job more seamless. These advisers know that technology helps re-engineer every step of the advising, investing and practice management process. It can empower you with greater capabilities to analyze and understand the state of the market—and the state of a client's assets—more accurately than ever before. It can optimize resources to help you build and maintain a more successful practice. In fact, for the most successful advisers, the only thing more expensive than adding technology is not adding technology.
Today there is an ongoing evolution of technology in general, and robo-advisers in particular. So get to know your robo counterparts—and you'll find that they aren't foes. Instead, they can help you to be more efficient and cost-effective. They can give you more time to focus on building relationships, providing specialized services and offering more holistic advice so you can better serve current clients—and bring on new clients—in today's highly competitive market.
Robo-advice can complement your practice, but it's no replacement for holistic financial advice. As clients begin to build wealth, the need for guided advice grows. And in the end, people still want to talk to people. They still want the human touch. Robo-advice is starting to gain momentum, but I'm still betting on advisers.
Mitchell H. Caplan is the CEO of Jefferson National. For more on the Advisor Authority Study, go here.
