Online Advice
Among the findings of an RIA survey released in November by Charles Schwab Advisor Services, 45% of respondents said they expect online investment advisory services will become bigger competitors to their business five years from now. And if these services take hold with younger investors accustomed to doing most things online, that threat could be even bigger in 20 years.

A recent report from the research and consulting firm Corporate Insight examined the fast-growing online advisory industry and handicapped likely winners and losers among more than 100 start-ups. The report, Next-Generation Investing, Online Startups and the Future of Financial Advice, divided these start-ups into 10 business model categories. These models range from algorithm-based investment advice and low-cost online managed accounts to online-only financial advisors and online financial planning and budget/cash management tools.

“While many of these start-ups will inevitably fail, those that succeed could change the very nature of investing, particularly as Generations X and Y begin to accumulate wealth,” the report said.

Among its findings, the report noted that Generations X and Y have higher expectations for online and mobile services and don’t see as much value in regular face-to-face meetings. Many of them are also skeptical about large financial institutions and tend to shy away from active investment management in favor of passive, index-based ETFs.

“These trends pose a clear challenge to existing financial institutions and create an opportunity for innovators that can offer cheaper and more technologically sophisticated alternatives than traditional investment firms,” the report said.

Grant Easterbrook, Corporate Insight’s senior research associate and the report’s author, tells FA that he doesn’t believe online financial advice will ever replace humans. “Putting someone in a portfolio based on time lines and goals can be automated to an extent and be offered at a much lower cost by these newcomers, and that’s where the real competitive pressure will come from,” he says. “But at the highest level, it’s hard to automate some high-net-worth services that advisors provide, such as setting up trust accounts.”

Easterbrook believes that fundamental change in the industry will occur when Gen Xers enter their peak earnings years because this cohort will have different preferences than their boomer parents.

“Generation X will still need advice with complicated financial decisions, but it’ll be with a different business model,” he says. “These trends will reinforce the shift to low-cost RIAs who have the legal obligation to do what’s in the clients’ best interest.”

In the aforementioned Schwab survey, 44% of surveyed RIAs said they believe investors 10 to 20 years in the future will want a different service model than today, but that technology is changing so fast and the needs are so different that they’re unsure what this new service model will be.

Some advisors believe the traditional business model of fee-based assets under management doesn’t cut it for a large segment of investors. “The traditional fee-only business model doesn’t work for younger clients who don’t have a lot of assets,” says Alan Moore at Serenity Financial Consulting. “The hourly planning model works, but you need a lot of clients to make that pay.”

Moore’s clients range in age from their 20s to 42, and tend to be high-income folks with limited net worth due to paying off student loans, mortgages and the like. Most have opted for the hourly model, but he says one-quarter of his clients have chosen a retainer model that charges 0.5% of net worth and an ongoing 1% fee of income for investment management and comprehensive financial planning. “So if they have high income and no net worth, that’s fine with me,” he says.