Over the last several months, I’ve traveled thousands of miles, met hundreds of advisors and spoken with numerous representatives of custodians, broker-dealers and software vendors. Although I’m generally rather upbeat about the future of this industry, there are some things that concern me about current affairs. While I’m not predicting Armageddon or anything close to it, I do believe that individual advisors and organizations that fail to address these issues will lose opportunities at best and suffer consequences at worst.
Complacency
If you started an investment advisory firm in 2009 and you invested in a traditional portfolio weighted toward U.S. equities, your returns since inception probably look pretty good. Your AUM, and hence your fees, are increasing nicely each year, and that’s even if you have not taken on many new accounts. Your computers may be past their prime, and you may never have benchmarked your current software against the latest generation of competitors, but why rock the boat, right? Everything is just fine.
Well, it is until it isn’t. I hope your firm can cope with its work flow during the next major downturn. If the last recession is any indicator, many firms will have problems.
Perhaps even more distressing is that there are advisors and firms who experienced the havoc of the great recessions yet continue to underinvest in technology. During the financial crises, the inefficiencies of different advisors’ processes were exposed as their client calls and service demands multiplied. The lack of automation caused many advisors severe hardship. Some have learned their lesson and are investing during this period of relative prosperity to better serve their clients in the future, but many are not, and they will be vulnerable in the future.
It appears to us that the gap between the best and the worst performing firms is widening. The top 20% are investing significantly in their businesses, the bottom 20% are not. Who do you think will be poised to grow during the next recession?
Integration
The state of software integration within our industry has never been better; unfortunately, it is still not good enough. Advisors want to be able to log on to their computers or tablets in the morning and seamlessly conduct all of their business from a single location with a single log-on. But for most advisors, that vision is closer to science fiction than it is to reality.
Advisor Xi from Envestnet/Tamarac offers an integrated solution that includes CRM, portfolio management, reporting (including a client portal) and rebalancing. The platform does not offer financial planning software, but it does offer integration with a number of industry-leading applications. Morningstar is another firm that offers a comprehensive suite of products, and its recent purchase of ByAllAccounts further broadens its lineup. Orion provides portfolio management software and reporting (and a client portal), as well as a custom version of Salesforce as an option. The software can be integrated with TRX for advisors seeking a rebalancing program. And it can be integrated with MoneyGuidePro, eMoney and GoalgamiPro for financial planning.
All of the major RIA custodians allow their platforms to work with third-party software to varying degrees, and the integration with these outside applications is meaningful, but there is still work to be done. Fidelity’s WealthCentral offers deep integration with a number of partners, but the list of vendors is too limited at the moment. Still, the company has recently taken some steps to address this weakness, and we expect more to follow. Perhaps no custodian has done more to foster integration than TD Ameritrade. But the integration is only as good as the work done by both parties—the custodian and the software vendor. TD Ameritrade has done a great job, but its vendor partners have had mixed results. We hear from advisors that more needs to be done.
Account Aggregation
When advisors are charging substantial fees for their services, it’s hard for them to skip account aggregation services on their Web sites. Robo-advisors and other consumer sites offer it (Mint.com and Personal Capital, to cite just two examples, make it available for free). But account aggregation is also important because it can reduce your reliance on inefficient manual labor—entering data into financial planning applications, for instance.
While advisors generally find the aggregation offerings available sufficient for their client portals and planning, I know no advisors (with the possible exception of those who work with Private Client Resources) who are happy with the accuracy of account aggregation when they are trying to use it for performance reporting. Quovo is one firm that claims to offer better aggregation, and its service looks promising, but for now the jury is still out.
Lack Of Cooperation
There are a number of things that we could do as an industry to make our lives easier, but collectively we don’t have the will to do it. Let’s take, for example, the issue of account aggregation as it relates to reporting. Many advisors would have no need for a third-party account aggregation service if they could just get direct access to their clients’ 401(k) accounts and 529 plans. From my perspective, this is more of a legal issue than a technology issue. The way the laws are written, plan sponsors control who can access a client’s account information, not the client. As a result, advisors have to go through an intermediary and incur additional costs to obtain the data. If we all lobbied Congress for a change in the law, allowing our clients more control over their own information, access to this data would be less problematic.
Data standards are another area where we could cooperate and drive down costs, but there does not seem to be a collective will to seriously tackle this problem.
Robo Advisors
As the cover story in our April 2014 issue (“The Rise of the Robo Advisors”) made clear, some people view automated online advisors as a threat to financial advisors and others don’t. Regardless, most think these sites are here to stay. I approach the issue from a different perspective, dividing the robo-model into two dimensions: technology and service.
And complacent advisors have much to fear from the former—the technology powering most robo-platforms is better than that supporting your typical RIA or B-D firm. I have personally opened accounts on at least two of these platforms to gauge the client on-boarding experience, and it is excellent. Unlike the typical advisory firm, many robo sites allow you to open an account electronically, sign forms electronically and fund the account from a bank account in a matter of minutes. Once you’ve established an account, the online portal experience is far superior to what many advisors I know offer.
And it’s particularly well suited to the Gen X/Gen Y market, people who are much more comfortable with an online/mobile/self-directed model. And these are the people you need to attract to grow your business. If they choose a robo-advisor over your firm first, you might find it difficult to entice them away.
Our industry has been slow to respond, technologically, to the threat. A number of firms offer a robust client portal experience, and a number of B-Ds and custodians do, but many do not aggregate held-away assets like the online sites do. (One leading third-party vendor in this niche is eMoney.) The number of B-Ds and custodians that offer true, electronic straight-through processing is still small, as is the number of advisors that have it incorporated into their own Web sites.
But there is help on the horizon. A number of firms are rolling out technologies that can help advisors compete more effectively. One relatively new firm, Oranj (www.runoranj.com) provides a platform for advisors with client Web portals similar to those robo-advisors provide, as well as account aggregation, and gives advisors the ability to rapidly open and seamlessly fund accounts electronically through two custodians. In addition, they offer robust marketing and communications.
Advyzon (www.advyzon.com), profiled in the April 2014 issue (/news/first-look-17392.html?issue=225) is another firm worth keeping an eye on. In addition to offering an all-in-one advisor workstation, Advyzon offers an attractive client portal and business analytics. Our understanding is that the firm will soon be offering account aggregation as well, and the platform should support straight-through processing in the future.
One custodian that appears to offer the tools necessary to compete in the online environment is Folio Institutional Some of the company’s technology powers WiseBanyan, a robo-advisor platform, and Folio Institutional is one of the custodians offering straight-through processing on the Oranj platform. It seems likely that other potential partners will leverage Folio Institutional in the coming months.
In addition, a number of B-Ds, custodians and third parties are working on providing better capabilities and better integrations to compete technologically with robo-advisors. Pershing’s latest version of NetXInvestor, for example, should help its advisors compete more effectively; but in other quarters we fail to see the sense of urgency we hoped to.
Technology alone will not put traditional advisors at risk, but poor technology combined with a poor business model surely will. So who is most at risk? Those who define themselves primarily as investment managers. Those who charge 100 basis points or more primarily for asset allocation services are going to come under pressure, since a number of robo-advisors charge 25 basis points or less—and WiseBanyan provides asset allocation for free, with no trading costs (outside its premium services.) I would argue that asset allocation services are becoming commoditized. If I’m right, superior technology and efficiencies will drive profitability in this sector in the future.
Many advisors will argue, as I do, that human advisors are worth a premium for the personal advice and service they provide. But there is no doubt that the low cost of robo-advisors will put additional pressure on margins, and advisors will need to be able to justify the fees they charge. Most advisors do offer behavioral finance guidance to clients, and that advice has value. The question going forward is: How much are clients willing to pay for it? We are about to find out. I suspect the premium will fall somewhere between what advisors typically charge and what robo-advisors charge for the service.
On a more positive note, as technology improves and efficiency improves, the industry as a whole (both humans and robo-advisors) should have a much larger market to serve. There are millions of Americans who could benefit from professional advice; in the future, more of them will have access to it.
Financial Planning
In most cases, financial advisors offer much more than asset allocation services and investment advice. They also offer risk management, retirement planning, estate planning and tax planning. It’s called financial planning. It provides significant value, and it is worth paying for. It has not been commoditized, and successful firms in the future will be those that really offer it, instead of just paying lip service to it.
I see a couple of issues with financial planning and technology. None of them are insurmountable, but the industry will need to make some adjustments. One is that even firms offering financial planning usually tie their compensation to AUM. If our real value proposition is planning, will clients start asking why they are paying a percentage of AUM instead of a fee? I’m not sure, but it is worth pondering.
The pricing structure of financial planning software also causes me to wonder about how professionals value it. I know firms that are spending tens of thousands of dollars, or more, for portfolio management and trading software. They are typically willing to pay only $500 to $1,500 per year for financial planning software. If the planning is the real value we provide, isn’t there some sort of imbalance here?
It may be difficult to discern from the tenor of this article, but I’m bullish on planning and planning software. I think a lot more financial service professionals are going to be offering planning services in the future, and in many cases they are going to be offering it at more competitive price points. That’s good for the firms producing the software, it’s good for the industry, and it is good for the public at large.
I just worry that many of my friends and colleagues are currently a little bit too complacent.
There is a tremendous need for professional financial advice, and the technology now exists to deliver it to a much larger audience at a reduced cost. If advisors are to prosper in the future, they will need to invest in the better technology in order to compete with robo-advisors as well as each other. Those that do will have an unprecedented opportunity to prosper. As for those who don’t, let’s just say that I hope they have been fully funding their retirement accounts.