When robo-advisers first began to appear, Raef Lee, managing director of SEI Advisor Network, and Cynthia Stephens of ByAllAccounts, a subsidiary of Morningstar, Inc. got together for a conversation to better understand these new services. Their conversation kicks off with Stephens’ take on the changes:
Today, we’re hearing a lot about the rise of “robo-advisers”— websites where investors use online tools to plan and execute their investment strategies, often without the assistance of a human adviser. For some, it conjures up images of a future where technology replaces investment management by humans, fundamentally altering the advisory profession as we know it.
Is this a real possibility or a reaction to disruptive technologies? This is one of the questions that Raef Lee and I discussed as we traded our observations about how robo-advisers are already changing the advisory world. What came out of our conversation are some tips that can help advisers adapt to the competitive challenge of robo-adviser websites and business models.
Cynthia Stephens: For the adviser who isn’t familiar with robo-advisers, how would you describe them?
Raef Lee: Robo-advisors are self-service websites that give users a suite of investment tools for accessing and analyzing their financial information online. Robo-advisor technology can cut humans out of the equation entirely, although in practice, that’s not always the case.
Robo-advisors are fairly new, practically brand new. They’re the result of new technologies, and are generally private startups out of Silicon Valley with venture capital funding.
The robo-advisers have put some nice user interfaces together. For tech-savvy investors, they provide instantaneous number-crunching of performance return metrics and lots of algorithm-based services that allow you to look inside investment data, slicing and dicing it in virtually any way you please.
Stephens: But robo-advisers are not necessarily always a 100% technology-driven solution, are they?
Lee: Some are 100%, but not all. Some of the early ones were very in-your-face. They were saying to investors, “Look at us. We can do all this for you without an adviser.” They were not very specific about the market they were going after.
Since that time, there’s been a maturation of the market. You’ve still got technology-only players like Motif Investing, that have put together a really nice setup and have targeted a specific niche they’re serving entirely through technology. And that seems to be working.
But you also see a number of robo-advisers that are starting to get deeper into the process and are saying, “Wait a minute, this whole idea of going without an adviser is really more difficult than it initially seemed.” Sure, some investors may not need an adviser most of the time. But when you do need one—say at the time of a birth or divorce or other important life event—you really need one. You need investment and personal advice.
That’s why you have sites like Betterment and Covestor, where you have communication between investors and human advisers, but exclusively through a web interface.
And even further down the spectrum, there are long-standing companies like Vanguard and Edelman Online, which have enhanced their existing online solutions and can now serve as robo-advisers. These are the hybrid solutions.
Stephens: Why are so many advisers worried by robo-advisers?
Lee: Like many new technologies, investment management technology can lead to a commoditization of the service. Because you can come up with an algorithm to provide investment management, the investor gets to the point where the interaction is all about the plan and the user interface rather than the actual investments involved. That’s a highly debatable approach, but it’s certainly part of the picture now.
And of course there’s the financial aspect. Using a robo-adviser is less expensive than paying for traditional advisory services—in many cases, far less. You cut out a large part of the human expense. This goes hand-in-hand with the commoditization we’re talking about—and it means robo-advisers are putting the financial squeeze on advisers and their fees.
Stephens: So do you think advisers’ concerns are justified?
Lee: My philosophy is that the adviser shouldn’t be worried by robo-advisers. Advisers should be focused on how to learn from them, rather than being scared of them. In many cases, what the robo-adviser can do, the adviser can learn to do, too—whether it’s working remotely with clients, putting a really good user interface in front of them, or being very clear in delineating what’s investment management and what isn’t.
Up until now, the robo’s bark has been worse than its bite. If you look at where they are today, none of the robo-advisers has more than a billion in assets. Which is really remarkably small, for the amount of time, money, and effort they’ve put in. The total for all of them put together, including Vanguard, is no more than $11 billion in assets.
Stephens: When you say advisers should try to learn from robo-advisers, as opposed to being afraid of them, what do you mean precisely?
Lee: Just as some robo-advisers are learning from advisers—by adding a human element to their service mix—advisers need to learn some lessons, too. In large part, they’ve learned the key lesson already—and it’s all about technology.
As investors have been introduced to robo-adviser sites, they’ve been impressed by the convenience and ease-of-use of the featured technologies—and they’ve come to expect the same capabilities from advisers. Many advisers have responded. They’ve made innovative technology part of their service offering.
Stephens: With the focus on tech, is there a particular demographic group the robo-advisers are targeting and with whom they’re succeeding?
Lee: It’s the group we call accumulators, or Gen X and Y. They’re people in good jobs, ages 30-40, who are starting to build wealth. A typical example is someone who works for a startup, or who’s a doctor or lawyer. They work hard and are part of a generation that knows technology. But they don’t have much time to manage their finances. They tend to be verifiers who are looking for confirmation of their decisions, rather than being complete outsourcers. In 10 or 20 years, they’ll have lots of money.
Historically, the advisory industry has not dealt with these investors because they didn’t have much money. But now, suddenly, the robos are putting together solutions for this group in a way that hasn’t been done before. It makes sense for the robos to focus on a market that feels right at home with new technologies and expects to pay less. The robos are going to gain traction here.
Stephens: Cost does play a role, doesn’t it?
Lee: In many cases, yes. But advisers are starting to adapt. I mean—look at the current environment. You’re seeing the emergence of robos that are focused on Gen X and Y. And then you’ve got advisers who’ve been living on their 1% client fees, regardless of what’s going on in the market. Because of the robos, there’s now more scrutiny on these fees. You’re seeing a shift in the ways fees are taken as firms try to come up with different pricing models.
Take the case of a Gen X/Gen Y investor who doesn’t have $500,000 in investable assets yet. The adviser’s approach may be to get in before this investor’s assets start to grow with a plan to not make much in fees now, but down the road.
But even in the early stages, the adviser still needs to make this relationship sustainable to at least cover costs and not kill profit margin by taking on the business. And so one way advisers are trying to do this is by coming up with retainer models, breaking out financial planning costs separately. But right now, many firms aren’t set up for this.
Stephens: Gen X and Y investors are the future of the industry. Do you think advisers will view the inroads of the robos with alarm?
Lee: I think it’s a case of advisers being woken up to the existence of the accumulators. They’ll start to come up with solutions for them. One of the most interesting developments has been the emergence of a group called XY Planning Network. It was just started by two industry heavyweights, Alan Moore and Michael Kitces who’ve taken the approach of, “Look, we’re going to focus on the Gen X and Y groups.”
They’ve put together a confederation of Gen X and Y advisers who are assembling a support team. The technology they’re using allows them to provide complete, instantaneous portfolio visibility to the investor—a page taken right from the robo-advisers.
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