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. 
 

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