Most advisors are torn over how they should react to the advent of robo-advisors. If they shouldn't fear robo firms as competitors, should traditional advisors join forces with this technology to make their businesses more successful?
The FPA BE Boston conference tapped right into that concern and curiosity and held an intense debate between Michael Kitces, the director of research at the Pinnacle Advisory Group, and Lex Sokolin, the chief operating officer at Vanare. It was moderated by Rich Ellinger, CEO of Wealthminder (who did have an obvious bias toward the robo side of things).
The session, called "RoboAdvisors: What You Need To Know -- Point/Counterpoint," was designed to provide two radically differing perspectives so the attendees could make their own decisions. Indicative of the topic's extreme popularity, attendees jammed into the room and spilled outside the doorways to listen.
Why Advisors Should Not Be Afraid
Kitces made it clear that he thinks a robo-advisor can basically be defined as rebalancing and on-boarding software. “It is good at solving that problem,” he agreed.
With that said, he believes the robo-advisors are finding it difficult to deliver more sophisticated services and bring on new clients. Kitces pointed out that even with $100 million in venture capital budgets, robo-advisors are raising minuscule amounts of assets, relative to the overall industry.
“Did E*TRADE put us all out of business?” he asked. Though he didn't say it, E*TRADE at one point actually went out to hire advisors to help investors manage their stock option and 401(k) plans.
“E*TRADE took the cost out of trading,” Kitces explained. It also targeted a different group of investors than advisors serve. Like online brokers and electronic banks, robo-advisors are not really competing directly with advisors. Kitces believes Schwab and Vanguard are the ones that feel the competition from robos, and that is why they jumped into the space.
He acknowledged that Vanguard is the biggest concern for advisors, since it has the brand and the scale and can do things at a third of the cost. “That is the real industry threat,” he said. That said, advisors are also major Vanguard clients.
Why Advisors Should Not Join Forces
Kitces doesn’t think it makes sense for advisors to join forces with robo-advisors to compete against the established competitors in the space. “Who is going to roll out your own business model for do-it-yourselfers?” he asked.
Even worse, he joked that nobody would want to go after the millennial do-it-yourselfers. “Don’t try to go head-to-head with a robo and compete with what they do,” Kitces warned. He explained that they are better at online marketing, so it is not worth going after the same market.
In an interesting analogy, he brought up the nursing home business. He suggested an idea where nursing homes would install nice flat-screen TVs to draw in the grandkids of the current tenants to be future customers. Traditional advisors do not need to do something so zany to get future business.
Why Robo-Advisors Are Going To Be A Success
To that point, Sokolin rebutted, “I don’t think a nursing home is like financial advice.”
He asked, “Why is a robo-advisor practice valued at 50 times revenue?” He continued, saying, “The answer is future growth.”
He pointed out that most advisors are doing a terrible job of capturing the next generation as clients before they gain assets. Many are not even trying.
Ellinger pointed out that this underserved group represents a huge opportunity and that robo-advisors are focusing on 100 million prospects with $9 trillion in assets. “It is a significant opportunity,” he said.
Adding Robo-Advice To A Traditional Business
Integration is key. “It isn’t a question of ‘should you?’” said Sokolin. “Schwab is out there. Vanguard is out there.”
He does not believe that advisors adding robo-technology to their offering need to compete head-to-head with the established robo-advisors. “Just because Betterment uses Google Ad words to get clients doesn’t mean you have to use the same thing to get clients. You have your own marketing,” said Sokolin.
Advisors have three robo-advisor options:
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Outsourcing -- in which clients use an outsourced solution;
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Light-touch integration -- in which software is added, but the organization might give it a different brand;
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The organization of all the pieces of the program -- in which everything is integrated so an advisor can have 500 clients instead of 50.
Kitces noted that robo solutions may help with client on-boarding, but that is hardly specific to millennials. Sokolin zinged him by saying, “I appreciate Michael making my points.”
Robo-advisors cannot be narrowly defined. They are in financial planning, account aggregation and automated movements. They advise on savings and more. “A robo today is not what it will be in a year or two,” said Sokolin.
Ellinger believes robo-advisors will enable advisors to broaden their market. “It’s a huge opportunity to grow your practice in a way that maybe you haven’t thought of,” he said.
Looking forward, Sokolin stated, “In 50 years, it is going to be the technological engaged model.”
Mike Byrnes is a national speaker and owner of Byrnes Consulting LLC. His firm provides consulting services to help advisors become even more successful. Need help with business planning, marketing strategy, business development, client service and management effectiveness? Read more at ByrnesConsulting.com and follow @ByrnesConsultin.