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.
There’s ample evidence that clients and prospects do want a well-designed portal. Mint.com, for example, has more than 10 million users. According to web analytics site Alexa, Mint ranks No. 207 for all web traffic in the United States. Other popular sites include Fidelity.com (No. 160 in the U.S.), Schwab.com (No. 421) and Vanguard.com (No. 566).
Another thing that clients want is an aggregated view of all their accounts. Here again, our industry lags. Most consumer sites offer simple aggregation. They provide balances, but not all of those pesky details like transactional data with cost basis. Advisors have access to this type of data through various providers at reasonable prices. Aggregating transactions and cost basis across multiple accounts is challenging, and it is more costly.
Robust solutions for advisors do exist, however. To cite just one example, eMoney’s new EMXpro platform provides an outstanding client portal experience on all devices, account aggregation, performance reporting (through its integration partners), financial planning, analytics and much more.
So do consumer-facing robo-advisor platforms pose a threat to your business? If you operate on a very limited scope, selecting investments and performing asset allocation tasks, and if you charge 100 basis points or more for the service, the answer is probably yes. Some advisors charge in excess of 150 basis points for wrap accounts of mutual funds, ETFs, separately managed accounts or some combination of these. The best case scenario for these advisors is margin compression. The worst case scenario is, well, a lot worse.
We think that some of the SMA and UMA providers will also come under some margin pressure. After all, the technology exists today to offer a virtually identical service at a much lower cost. Successful providers will deploy improved technology, allowing them to effectively compete in this rapidly evolving market place. Those who don’t adapt will suffer.
On the other hand, we believe that those firms offering comprehensive wealth management/financial planning services at a competitive price will be fine. In fact, robo-technologies will present opportunities for such advisors.
The Opportunity
We suspect that few advisors feel threatened by consumer-facing robo-advisors because they doubt the validity of the business model. That’s debatable, though we don’t plan to argue that case here. We will point out that Schwab, for example, needs to attract significant assets to its platform, Intelligent Portfolios, to justify the cost of building it.
What seems clear to us is that the technology powering the robo-advisor platforms is a disruptive force that creates opportunities. For example, to the degree that it encourages traditional vendors to the advisor community such as eMoney to significantly upgrade their platforms, there is an opportunity for advisors to lower costs, improve efficiency and provide a superior client experience. The same can be said for the platforms being offered by custodians and the newer business-to-business robo-technology vendors. We see this as a significant win for the advisor community at large.
The greater opportunity, however, may be that new technology will open up new markets to advisors. Many firms have instituted high minimum account sizes to address their high overhead, effectively excluding most of the U.S. population from their services. But what if there was a way to offer basic financial advisory services at low cost and on a great scale? That’s exactly what robo-technology platforms will allow you to do. Enterprising advisory firms will identify the new growth opportunities that these technologies offer.
For example, advisors can now provide the services that robo-advisors offer with a human touch at a competitive price. The model will be lower-cost and lower-touch than your traditional services, but if clients call, they get a real advisor on the phone. Furthermore, as these clients build wealth through the services you provide, their financial situations will become more complex, and you will be able to graduate them to your full-service model. Thus, your low-cost offering will create a pipeline for the future growth of your wealth management business.
Another scenario is available to those firms with in-house investment expertise. With technologies offered by firms such as Motif Investing or Folio Institutional, to cite just two examples, firms can create their own SMA or UMA platforms at a low cost for their clients. They can also create portfolios based on their own stock selection criteria and make them available to other advisors for a fee.
These are just a few examples of the opportunities that technology advances make available to enterprising advisory firms. There are others.
Challenges Remain
While we are generally optimistic about the new opportunities presented by these new emerging technologies, challenges remain. Perhaps the largest one is integrating these new technologies into the advisor ecosystem. For example, it seems obvious to us that advisors will require integration between their CRM and these platforms to more effectively track prospects and clients. If, as we believe, financial planning software will play an increasingly critical role in the advisory practice of the future, integration with financial planning software will be a necessity as well. Depending on the technology platform you use and your business model, integration with billing software and other tools will also be highly desirable. To date, few if any firms have managed to integrate robo-advisor technologies with custodial technology and with traditional third-party vendors. This too will change in 2015. As Tom Nally pointed out, his firm is committed to integrating multiple emerging technology partners into the VEO ecosystem in the coming months.
Closing Thoughts
The new technologies coming to market in 2015 have the potential to shake up the status quo, most likely for the better. It will be up to advisors to familiarize themselves with the capabilities of the various products and to implement them in innovative ways. The introduction of important new technologies into an industry always creates both winners and losers, but on the whole, we expect the advisor community to benefit from the new robo-technologies that will become available to them in 2015.