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:
Lee: In what ways do you think robo-advisers have upped the ante for all advisory firms in terms of technology?
Stephens: The robo-advisers give investors a 360-degree view of their portfolios, a comprehensive picture that allows them to see all their holdings at once—and to take action from there. Many paper-based firms have never provided this capability. In the investment world as it existed, they never had to.
But now, investors expect this type of transparent access as a mandatory requirement when they look at their portfolios.
These are the new rules for advisers who want to stay in business. It’s why client portals are now standard operating procedure. They keep advisers and investors on the same page during an adviser presentation, or when they jointly view assets and make investment decisions. And this trend will accelerate because of mobile devices. Investors will have anytime, anywhere access to data, tools, and communication channels.
Lee: Okay, client portals are now essential. Is it simply a matter of advisers using portals to play catch-up?
Stephens: No, it goes beyond that. Recently, I spoke with Bill Wyman, CEO of Summitas, a firm that serves family offices. By definition, these family offices have very high-net-worth clients. Bill told me that in many cases these wealthy families don’t focus on the typical everyday ups and downs of the market as it relates to net worth. What Bill maintained, and I think he’s right, is that these folks are mostly concerned about their philanthropic activities and how their businesses are doing.
Where it gets really interesting is that these family offices are using client portals not only for portfolio reviews, but also for urgent two-way communications with dispersed families. For example, suppose there’s a crisis that requires the family to make a decision. The family office will send text messages to all the family decision-makers who may be in different time zones or even different countries and continents. The text will tell the family members to log into the portal at a certain time to share their opinion or respond to the matter.
So it’s not just a case of a robo-adviser providing data on a portal, or even an adviser pushing out information on one. Rather, it’s about taking client service to a whole new level. This concierge-level service may be appropriate for a different clientele than many advisers serve, and it may be a level of service that’s impossible to provide. But it’s an interesting look at how to outperform the robo-advisers.
Lee: Good example. But in more general terms, how do advisers truly differentiate themselves from robos, fend off their challenge, and continue to grow?
Stephens: The differentiating factor all comes down to human interaction—precisely the element of investing that the robo-advisers have eliminated or reduced. Technology only takes you so far. Investors have repeatedly been surveyed on whether they want the perspectives and insights that are part of getting investment advice from a real, live human—and they mostly answer “yes.”
Of course, that’s not saying they always prefer to be adviser-dependent when it comes to managing their investment strategies. Many investors are what we call event-driven. They make their own investment decisions most of the time, but prefer to turn to advisers for assistance at important junctures in their lives, such as marriage, divorce, or retirement.
Event-driven investors are seeking something the robo-adviser sites can’t offer—namely, the wisdom and experience of a human adviser who personally knows the investor. They’re looking for an adviser who can make an investment recommendation that transcends algorithm-based number crunching.
Let’s say the adviser knows members of the client’s family who will experience the effects of the client’s decisions. That firsthand knowledge can make a huge difference in what the adviser recommends and what the investor ultimately decides to do. If the adviser’s clients are baby boomers, what if they need to make highly emotional life decisions that have financial implications, such as elder care planning or health care planning? Or what if they’re small business owners looking to sell? Or if they need to make plans to transfer wealth to the next generation?
Unlike a robo-adviser, an adviser is flesh and blood and can empathize and advise. You’ve also got to factor in the client service element. A human adviser can go the extra mile in terms of timeliness and effort—again, something the robo-adviser can’t match.
It’s the one-on-one, adviser-client relationship that keeps advisers ahead of the robos. Even if the adviser isn’t consulted on most of the client’s investment decisions, he or she can still cultivate the relationship and be there when needed most.
Lee: How about the accumulator investors we’ve been talking about? Won’t they tip the scales toward robo-advisers over time?
Stephens: Studies have shown that Gen X and Gen Y investors are at least as likely as their older counterparts to be willing to pay for advice from an adviser. That serves as a clear counterpoint to the assertion that younger investors are totally unwilling to pay fees and will gravitate to an automated, less-expensive solution when given the choice. It also suggests that Gen X and Gen Y will continue to use advisers’ services in the future.
Lee: So you’ve got investors who want sophisticated technology and human interaction. Where does that leave the typical adviser?
Stephens: It leaves advisers with a new paradigm for success—something I like to call “The Best of Tech Meets the Best of Talk.” It’s the best of both worlds, and it’s where today’s traditional advisory firm should aspire to be. It adopts the leading technologies of the robo-advisers. And it features personal adviser involvement when the investor prefers it.
For advisers to succeed at providing good advice and ward off the robo-adviser challenge, they need to be more than tech-conversant and more than empathetic. They also need access to the best data. When they’re looking at asset allocation or at how to initiate an estate planning strategy, advisers require a level of data quality that is not readily available.
They need what we consider institutional-class data—rich data delivered efficiently and cost-effectively with reliable security identifiers, and that above all else, the adviser can trust. You don’t always find this type of quality data on the low-cost robo-adviser portal.
Lee: So what’s the mindset of the average adviser as we look ahead?
Stephens: Many of them feel like they’re stuck between a rock and a hard place. At the high end, there are these concierge service models—for example, family offices that are starting to use portals in a richer, more meaningful way. Now that’s a positive for investors, but it does put pressure on the adviser.
At the lower end, you’ve got a client who is using a robo site, and says, “I just want you to help me with this one aspect of what’s going on in my life.” What does the adviser do? The adviser still has to review the client’s assets, perform an asset allocation exercise, and then provide advice. In the past, the adviser would just charge based on the value of those assets, but now those assets may reside on the robo site. It’s a dilemma for advisers who use a business model that isn’t structured to charge a retainer fee, or so much per hour, just to provide advice.
There’s no question—robos are beginning to change compensation structures throughout the industry, and this will accelerate over time. There will be more uncertainty as advisers figure out how to modify and overhaul their business models. It’s a first step in the process. But the human advice element will remain an important differentiator for mid-level firms, as well as the quality of the aggregated data that’s backing this human advice up.
Stephens: Raef, how would you sum things up?
Lee: My overwhelming take is that this is going to be positive for everyone—apart from the robos who don’t make it. For the industry, it’s like a kick in the pants. I think advisers will do a better job and you’ll see new markets served. This is a disruptive element causing change that’s generally for the good. With all change, some people are slow to adapt and some people adapt well. It’s all about what you do to change.
This is the concluding part of the interview. Read the first part here.
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