Beware robo-advisors! Much is being written today about the proliferation of online investment advice that claims to offer similar services as investment advisors for significantly lower fees (75% less?) There seem to be three differing opinions about their impact on financial advisors.

One group theorizes that they will either force advisors to significantly lower their fees or go out of business. Many consumer journalists seem to share this opinion. And the reality is, if all one does is manage portfolios, they may, in fact, be correct. Consumers will eventually gravitate toward lower prices if services are similar. As Bob Veres has written, “In my eyes, sites like Wealthfront and Betterment have done something quite unremarkable: They managed to commoditize a service that was already a commodity to begin with.”

In other columns for this publication, we have often written about how investment management can be a commodity. These robo-advisors have capitalized on that fact and have automated the investment process. While it is true that asset managers may provide more personalized service than anyone can expect from computer-driven programs, the perception among many consumers will be that they can get the same service for significantly less money. And this, in my opinion, may cause considerable problems for many pure asset managers who deliver little service outside of managing portfolios.

Another group believes that these platforms are just passing trends and that consumers will eventually see the differences and be willing to pay more. So there is no reason to panic or change what you’re doing; be patient and all will be well. We only need to look at the history of so many companies who ignored what they thought were “passing trends,” continued business as usual and are now out of business. Tom Peters points out in his book Re-imagine that between 1957 and 1997, 426 of the 500 S&P companies had ceased to exist. While each of these companies undoubtedly has its own story, I suspect that many of them neglected or refused to recognize trends and alter their business plans. For Kodak, it was digital photography. For the railroads, it was air transportation. In my opinion, ignoring robo-advisors is not an option.

The third group, of which I am a member, believes that this threat is real for those advisors who primarily offer asset management services and do little or no financial planning. However, comprehensive financial life planners who do not charge their fees based on a percentage of the assets they manage will probably survive and actually prosper by distinguishing themselves from these robo-advisors. So for those among us who charge a percentage of assets and deliver comprehensive financial planning services as part of that fee, I would recommend changing your fee structure in one of two ways. Either, as Bob Veres has suggested, bifurcate your fees by charging a significantly smaller fee for the assets you manage (such as 25 basis points) and the balance for all the other services you provide.

At our firm, we have chosen to charge flat retainer fees that encompass all of the work we do for clients, including managing their investments. We reassess these fees every three years. As I have written so often in the past, in spite of what we may say or do for clients, if we get paid with a percentage of assets, they may perceive us to be primarily money managers and when comparing our fee with those of the robo-advisors they may believe that they are overpaying. While this may not affect current clients who truly understand the value added that financial planners bring to the relationship, it may be a problem for prospects who are shopping for advisors.

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