It’s time to change our thinking about the so-called robo-advisory firms that are moving into the financial planning landscape. They are going to be far more beneficial to the planning/investment advisory profession than any innovation in recent decades.
Of course, the initial response was that the online investment services represented a mortal threat to advisory practices, because (it was argued) they undercut the pricing structure of the AUM service model. Why pay 100 basis points for portfolio management when you can pay 25? Ignored in the initial panic was the fact (confirmed in my industry presentations when I polled large audiences of advisors) that no advisory firm has yet reported losing any clients to the robo-competition. (If you have evidence to the contrary, please send me a note.)
If you’re not losing any clients, then what is the real impact of these online platforms with their fancy technology and lower pricing? Let’s explore three ways these firms are changing the planning ecology, and note that all of them are not just positive, but significantly positive.
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Robo-advisory firms are expanding the market for investment advice
If the online investment platforms aren’t taking clients from the planning and investment advisory community, then where are they getting the $16 billion in assets ascribed to them by NY-based Corporate Insight?
The obvious answer is that most of that money is “new money” from people who have not purchased investment advice in the past. This, of course, makes sense; people who might not be inclined to pay 1% of their assets, or who can’t meet a $500,000 minimum, or who aren’t comfortable in a delegator role, are going to see Wealthfront as a less expensive alternative where they have more control over their portfolio management. This suggests that many thousands of people are getting their first taste of professionally-managed portfolios. They’re in the early stages of becoming potential advisory clients.
One can safely speculate about the outcome. As non-wealthy customers accumulate more assets, they will inevitably start asking questions that an online service provider can’t answer, related to planned giving and estate planning, IRA rollovers, Roth conversions and, most basically, whether they can afford to retire or switch careers to something less demanding and stressful. At that point, they may be inclined to ask a professional (human) advisor for guidance, leading to a larger pool of prospective clients in the future.
The online investment services are not unaware of this potential for clients to migrate from a non-sticky low-advice model to comprehensive planning firms. Personal Capital and LearnVest already incorporate financial advisory services. At different ends of the cost spectrum, Edelman Financial and Vanguard’s online platform were both built with on-call advisors in the loop. Others will follow suit. “We intend to add financial planning tools in Version 2 or 3, so we can link financial plans to the portfolios and create an end-to-end solution,” says Steve Lockshin, founder of B+ Institutional Services, which is the distributor of Betterment Institutional to the advisor community.
Robo-advisory firms are creating institutional platforms that will improve the economics and expand the client mix of advisory firms.
The most interesting, and under-reported, trend in the online investment space is how quickly the robo-competitors have migrated toward working with advisors as well as against them – a migration that is identical to what we saw from the discount brokerage custodians in the 1990s.
Would YOU call this a trend? Since their founding, Folio, Betterment, Jemstep, NestEgg Wealth, SigFig, Trizic and Motif Investing have all created institutional versions of their services – outnumbering the robo competition that is still clinging to the consumer-only model (Wealthfront, Personal Capital, Covestor and FutureAdvisor). The free robo-service the Schwab organization will eventually roll out (to be named Schwab Intelligent Platforms) will be jointly born in the retail and institutional space.
Some robo-firms skipped the retail stage altogether. Upside Financial co-founders Juney Ham and Tom Kimberly created their online advice technology with the goal of launching a state-of-the-art consumer robo-platform. Then, pre-launch, they decided to become exclusively an institutional resource for advisors instead. Why? “The providers of advisory and investment services already have the clients and the assets,” says Kimberly. “We decided it would be better for us to solve challenges and problems in the industry than to sell ourselves directly to the public.”
Ramak Fazeli, who markets Motif Investing’s institutional services to advisors, says his company’s advisor services launch was initially an attempt to accommodate advisors already using Motif with their clients. “They asked us to create a way for them to onboard their clients digitally with us,” he says, “and they wanted to be able to keep track of their client portfolios globally. After we did that,” he adds, “they started asking for other things, like single-rebalance functionality across all clients, and the ability to push a single button that executes all the trades and brings all the portfolios up to the current construction. Before long, we had an institutional platform, and advisors are now a big source of assets for us.”
Fazeli says that Motif Investing’s advisor customers tend to be run by younger advisors who cater to younger clients. This cohort of investors wants to co-participate in selecting motifs and building portfolios. Meanwhile, for established advisors, the new online institutional offerings address a huge and growing need: they allow advisory firms, at very low cost, to service accounts that are smaller than their traditional minimums.
Most advisory firms service the children of their best clients, or individuals referred by their best clients, by creating a bottom tier (the “C” level) who receive investment management but not a lot of planning or hand-holding, for a reduced fee. This was always an awkward arrangement at best. Over the past 10 years, a handful of advisors created robo-like investment platforms that leveraged their firms’ own investment research, and, with limited success, marketed these services to other advisors. The most prominent were RamseyInvesting.com by Ramsey & Associates in Seattle, Edelman Online from Edelman Financial, and Wealthbridge, created by R. W. Rogé & Co. in Bohemia, NY. The problem? Not many advisors want to refer the children of their best clients to a competing advisory firm.
Today, any advisor can simply plug the institutional version of Betterment, Motif Investing’s Advisor Platform or Trizic onto their service offering, and provide instant access to portfolios created using the investment research and resources that serve the firm’s higher-net-worth clients.
Working with these orphan clients has become a stated mission among some of the new institutional platforms. “One of the things we heard over and over again,” says John Stein, founder and CEO of Betterment, “is: I have all these customers who I would like to service, but they just don’t work with my model. I wish I had a platform where I could put them on there, get their investments managed in a way that is compatible with the way I would manage them, and do some monitoring that doesn’t require a lot of time and overhead. Betterment Institutional,” he adds, “gives them the ability to onboard anyone, let them self-service to the degree that you’re comfortable, and continue to own and manage the relationship.”
“Whenever we talked with advisors about their pain points, they would pretty consistently tell us that they often turn away clients whose assets don’t meet their minimums,” says Kimberly, “even though they know that in three to seven years, their financial needs are going to be more complex and they will be able to add a lot more value. They were having to turn away some of their best future clients. At the same time,” he adds, “a lot of advisors were taking on those clients and having trouble servicing them profitably.”
Bigger picture, the combination of robo-advisor and planning firm is making it possible for the profession to aggressively seek out clients from the Blue Ocean middle-income sector of the marketplace without a lot of additional expense. If they add a staff member who provides planning advice suitable to the less wealthy client – like budgeting and cash flow services, advice on student loan debt and home mortgages – they take a long step toward realizing the profession’s ancient goal of financial advice for everybody, which is a precursor to becoming a true profession alongside medicine, legal and accounting services.
This is particularly important for a profession that somehow forgot to include younger clients in their firm’s client “portfolios.” When many Baby Boom founders started their firms, they worked with their peers – typically nonwealthy people in their 30s and 40s who, as they grew wealthier, pushed the firm’s investment minimum up to levels that were prohibitive to the next generation of 30- and 40-year-olds.
Kimberly adds that many advisory firms are not technologically attractive to younger potential clients, with their quarterly performance statements and non-collaborative approach to investing. This is reinforced at the other end by frequent complaints, at industry conferences, from advisors who view younger consumers as an incomprehensible alien species. “Investment advisors are beginning to clue into the fact that the next generation of investors has a very different technology attitude,” Kimberly says. “They consume financial products and services very differently than their parents do.” The combination of cost-effectiveness and slick online technology creates a better business model and, at the same time, a more attractive offer to the lost generation of accumulators who are necessary for a healthy client portfolio.
But this still doesn’t cover the full range of benefits that are trickling down from the robo-revolution. Down the road, these online investment platforms are quietly aiming for a much bigger disruption in the financial planning ecology, which could result in significant time and cost savings for the profession.
Having access to a low-cost investment platform will also allow advisory firms to fully turn on their referral spigot. Many firms try to pre-qualify who would be a good fit with clients instead of asking for a chance to simply improve the financial lives of friends, colleagues and neighbors. The result was a clogged spigot; advisors really didn’t want to receive a lot of unqualified referrals, which would either force them to turn away a friend of an important client or try to figure out a way to accommodate dozens of referrals who have less than $100,000 to invest. If they are finally able to twist the referral knob all the way, these firms would have a way to service less wealthy clients, and bring in a greater number of clients who are appropriate to their model. This, too, will expand the reach of the planning profession.
The robo-competition will drive down custodial costs and raise service levels for advisory firms
In recent months, we’ve seen a rush by the custodians to integrate with the robo-institutional platforms. Advisors affiliated with Fidelity can now access, through Fidelity Institutional Wealth Services, the online services of Betterment Institutional and LearnVest. Advisors who manage portfolios through Shareholders Service Group have access to Upside Financial, which provides paperless account opening, portfolio creation, trading, rebalancing, billing, cash management and the ability to allocate different assets toward different goals. Clients and advisors can co-create the portfolios, and co-access their accounts, through custom URLs created for each advisor, as part of the white labeling process.
TD Ameritrade, meanwhile, has recently integrated with San Francisco-based Trizic, perhaps the newest of the online service platforms, adding it to a list that already includes Jemstep, Upside and NestEgg Wealth. (SigFig will be integrated soon.) In each case, advisors can white-label the platform so that their clients think the service is being provided by their planning firm.
This custodial embrace of institutional online platforms suggests that the custodians view them in the same category as turn-key asset management platforms (TAMPs), similar to Envestnet – that is, investment-related service providers who live under the custodial umbrella. But the online providers themselves quietly regard themselves not as mere service providers. Ultimately, they see themselves as full-fledged online platforms which can replace rather than enhance the advisor’s current custodial relationship.
Are they willing to say this out loud? “We are not just a software product,” Stein told me in an interview. “We’re a platform.” Stein adds that his firm has been in conversations, even before the launch of Betterment Institutional, with larger firms who are interested in transferring their entire custodial relationship over to the robo-platform. “The advisors with a giant book of business,” he says, “would rather be spending their time on high-value activities like estate planning, trust creation and having dinner with clients, than spending their time supervising the back office.”
Think of them as custodians with benefits. Some are adding investment services that are very different from what you can get from any custodian currently. If you believe in certain investment themes, chances are one of Motif’s 151 pre-created portfolios will give you a way to invest in it directly – including a biotech breakthrough portfolio, a specialized portfolio in shale gas, in 3D printing, tablets, one that bets on the home improvement industry, others focused on cybersecurity firms and social media companies – and my personal favorites, the “fighting fat” portfolio that invests in companies and industries designed to help individuals lose weight, and the “caffeine” portfolio that invests in coffee-related companies. (I also admire the portfolio that weights its stock holdings based on the raw number of Facebook “likes” each company has collected.)
Betterment Institutional makes it possible for advisors to create more generic portfolios out of ETFs, and provides the usual automated billing plus an account view that looks more like a portfolio reporting software system than a custodial platform. But then it adds other services that most advisors are either doing manually through their current custodian or contracting out to a third-party provider: full reconciliation of accounts, automated online reporting that clients can access on any device, plus automated tax-aware rebalancing according to parameters that the advisor herself establishes, and tax-loss harvesting. Charitable services will come online next year.
Costs have tended to be lower than the all-in costs of maintaining several different software applications, plus custodian and trading costs, plus the back office needed to run everything. Upside charges 10-25 basis points all-in. The trading and custodial costs at Betterment Institutional are built into the 25 basis point fee schedule. Motif Investing and Foliofn both let advisors tap into pre-created portfolios at dramatically reduced costs (zero trading fees for Foliofn, $4.95 a global trade for Motif across portfolios).
“Advisors are interested in our platform because they’re doing so many things manually,” says Stein. “Tax-loss harvesting is a time-consuming process that has internal costs. If we do it all for them, we save them time and money, which they can reinvest with their clients.”
Another possible competitive differentiator is that the robo-institutional platforms are white labeled. When the consumer looks at a statement from Upside or Betterment Institutional, online or on paper, the report doesn’t show an advisor affiliated with Schwab, TD Ameritrade or Betterment, but the advisor only. “I have never seen a platform,” says Stein, “that has the advisor branding for the client on all the statements, that has all the login and signup all electronic through the advisory firm’s branding.” That’s only because he hasn’t looked at the other robo-platforms who are moving into the institutional space.
This is not to say (as some will interpret it) that the institutional divisions of discount brokerage firms are going the way of the dinosaur. But it’s certainly possible that the custody/clearing platform space is about to become far more competitive, both in terms of pricing and (perhaps more significantly) in terms of built-in features added to the standard custodial package. Look for the custodians to buy some of the most popular, feature-rich rebalancing and trading tools similar to what TD Ameritrade did with iRebal, and turn what has been a collaborative relationship with the software ecology into fully-integrated solutions. Add Trade Warrior to the Schwab platform and its rebalancing and trading functions instantly become competitive with the top robo-platforms.
The bottom line here is that what was initially considered a threat to advisors is rapidly mutating into the best friend advisors have ever had. So-called robo-advisory firms are expanding the overall market for financial advice by attracting customers who might never have considered working with a financial planner. The robo-firms that are creating institutional divisions address one of the profession’s most difficult practice management issues by allowing them to bolt on a white-labeled asset management platform that will, at very low cost, let them manage the assets of their nonwealthy “C” clients. And they are creating new competition in the custodial space, both in pricing and by adding automated features that have, heretofore, required additional software and manual activity.
This robo-invasion is the best thing that’s happened to the planning/advisory market in decades. Let’s stop wringing our hands, and celebrate the robos among us.
Bob Veres’s Inside Information service is the best practice management, marketing and client resource for investment advisors and financial planners. To get a free sample issue of Inside Information, send your request to [email protected], or order online at http://www.bobveres.com.
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