Nicholas VanDerSchie, Head of Operational Excellence at Morningstar, shared his views at the Morningstar Investment Conference held in Mumbai on October 23 & 24, 2018.
Below is an excerpt from that discussion moderated by Jeffrey Ptak, global head of manager research at Morningstar.
What advisers should be thinking about when it comes to automating their practices. What should they focus on as first step?
The term ‘robo-adviser’ is misunderstood. People think traditional advisers can be replaced by robos. It's not about the technology versus the human. It's about how clients want to be served. In United States, advisers have traditionally focused on serving the needs of baby boomers or older clients. The service model required for millennials is different from that of older clients. It is about serving your clients in the way they want to be served.
They have grown up with taking Ubers, using Amazon and Alexa and they can see when their pizza is being delivered by looking at their iWatch. A very frictionless experience. The old model in financial services may not resonate with millennials. They don't want to come into a physical office every quarter to review quarterly performance reports that are week stale. They want the information delivered to them in real-time and be able to communicate in the way that they want to communicate. It doesn't necessarily mean in-person. It could be through a text message; FaceTime or Skype. So it's less about one versus the other and more about being able to use technology to cater to a younger demographic that will ultimately allow you to diversify the types of clients that you can serve within the context of your practice.
Some of the most successful robo-advice models are a combination of digital and human. Should advisers explore this option?
Some of the early entrants in the robo space are Wealthfront and Betterment. Their solutions for the most part are algorithm-based, technology-only, void of a human adviser. They've done reasonably well. But the reality is, they cater toward a very specific, probably newer investor, having less than complex goals. That approach has garnered them about $35,000 average account balance.
Let’s look at another example of Vanguard, a very traditional asset manager, that opened it up to allow for investors to not just interact over a website, but actually call into a phone center. At any point in time, they could call in and talk to certified financial planners, paraplanners and registered financial advisers. So, again, it's just a little more high touch and that model has allowed them to capture an average account balance north of $150,000. Significantly more than the pure robo model.
At the other extreme, you have firms like Personal Capital that allow you to access to a dedicated team after a certain account threshold. It's not a call center where you'll get one adviser one day, and a different one the next. You actually are working with the same team of two or three registered advisers who guide investors. It’s more like a traditional model but simply done via the web and over the phone. There is no face-to-face interaction. This model has allowed them to capture an average account balance of almost $400,000.
So these firms are being able to deliver more value by hiring humans. There's certainly things that a financial adviser can do that a robo-adviser will never do. For instance, behavioral coaching. That's something Wealthfront and Betterments of the world are going to struggle with.
Can automating free up an adviser to focus on greater value-added activities that he/she specializes in?
Many financial advisers are independent business owners. They focus on relationship management and asset gathering. Some of them do back office activities like reconciliation. Others are investment managers. As practices continue to grow, a lot of advisers ask how does this thing scale. You can't be everything. Advisers time is finite.
A good financial adviser has to assess what he or she does well and where they want to add value and outsource everything else. If you want to be an investment manager and do that make sure you are surrounded with the right research and tools to be able to deliver that proposition to your clients. If you want to be a financial planner, make sure that's where you are delivering your value. It's about figuring out where you want to add value, thinking about how you want to spend your time and ultimately building your practice around your value proposition. And then, once you have that figured out, figure out what else you can outsource. There is a lot of great technology providers that partner with financial advisers to allow them to outsource the areas where they don't want to spend their time. It's ignorant to think that you can spend your time on everything and be good at everything. I think being real with yourself and identifying what those trade-offs are is really important.