Threat Vs. Opportunity

In my role as technology columnist for Financial Advisor, I have the opportunity to spend a great deal of time talking to technology vendors, broker-dealers, custodians and advisors about technology. With a few exceptions, just about everything I’ve heard and observed over the last few months has me very excited about the prospects for advisor technology in the coming year. Today we’ll discuss a few of the major technology trends in the industry and discuss how they will impact you and your business in the year ahead. We will view a number of these trends through an examination of robo-technologies, since these platforms exhibit a number of trend-setting characteristics.

Robo-Advisors: Threat Or Opportunity?
In early 2014, most of the advisors I spoke with were not worried about the potential threat that direct-to-consumer robo-advisors posed to their businesses. Although a recent industry survey indicated that only 12% of advisors viewed robo-advisors as a threat, we think that attitudes are rapidly evolving. In mid-October, Fidelity entered into a referral arrangement with Betterment Institutional (/news/fidelity-first-custodian-to-offer-advisors-a--robo--platform-19523.html). Shortly thereafter, Tom Nally, the president of TD Ameritrade Institutional, shared his firm’s approach to robo-technology with advisors (http://www.technologytoolsfortoday.com/blog/td-ameritrade-s-tom-nally-discusses-robo-tech-t3-s-joel-bruckenstein). Then, top executives at Charles Schwab announced they were building their own robo-advisor platform that they would be making available to both their retail and advisor clients (/news/bernie-clark--schwab-s--robo--platform-is-no-threat-to-advisors-19788.html).

All of this activity around robo-technologies on the part of large RIA custodians should indicate to even the most skeptical advisors that something significant is going on. The more progressive thinkers among us might reasonably ask: What is going on here, and does it pose a threat or an opportunity to my business? The answer depends on a few key factors, including the current state of your technology, your business model and your plans for the future.

The Threat
In 2014, some of the leading robo-advisor platforms did an excellent marketing job. They received a great deal of publicity from national media outlets, which helped heighten the awareness of their brands. Much of their story revolved around price. These firms claim they can offer the same or better advice than you do at a sharply reduced cost. Clearly, that’s not the case. The direct-to-consumer robo-advisors that we’ve seen offer asset allocation and, in most instances, some type of rebalancing. Typically, advisors offer a much broader range of services for the fees they charge.

We think the robo-advisor’s price advantage will be largely neutralized in 2015. By the end of the first quarter, Schwab is scheduled to launch its platform for retail customers. Schwab will be charging zero for the underlying technology. Its profit will come from low-cost Schwab ETFs, to the extent these funds are included in model portfolios. Shortly thereafter, Schwab plans to make the same underlying technology available to advisors who custody with Schwab.

Other financial firms that serve advisors are certain to follow suit with similar technology offerings. Folio Institutional, another custodian, offers Advisor Connexion, a platform that allows advisory firms to build their own robo-advisor solution. In addition, there are numerous third-party providers such as Jemstep, Oranj, Trizic, Upside and Wealth Access that are marketing robo-technology platforms to advisors.

Robo-advisors also have an advantage in the strong end-user experience they offer—in the clients’ onboarding process; in the clients’ ability to manage cash (through follow-on investments, withdrawals, etc.); in clients’ ability to see a consolidated, aggregated view of their holdings; in the clients’ ability to view their portfolios 24/7 from any device; and in the products’ ease of use.

As we enter 2015, few advisors can offer their clients a seamless, paperless, onboarding process. Until recently, at least one major custodian we can think of was still insisting on receiving account applications by mail or fax. By contrast, robo-advisor platforms allow clients to open and fund accounts in a matter of minutes through an easy, intuitive online process. In fairness, most of the consumer-facing online sites offer a more limited menu of account types and titling than your custodian does, but they do offer most of the popular ones (individual, joint, IRA, Roth IRA, etc.). Before the advent of the robo-advisors, there was little incentive for broker-dealers and custodians to invest in state-of-the-art client onboarding technology. That is no longer the case. As a result, investments are being made in this technology, and we expect it to become widely available to advisors in 2015. This technology is no longer an option. It is a necessity.

Another aspect of the user experience is the client portal. Here again, the advisor community trails. To some extent, this is understandable because advisors who were early adopters of portal technology were often disappointed. Many of the early client portals were overpriced and poorly designed. Cutting-edge firms that were at the forefront of rolling these portals out to their clients often found that few clients used them, and those that did use them did so sparingly. Many advisors mistakenly concluded that their clients did not want a client portal. What they should have concluded is that their clients did not want a poorly designed, difficult-to-use portal.