Why Ron Carson is afraid of robo-advisers

In a Take Five interview, the adviser-coach says traditional advisers risk irrelevance if they can't respond to firms like Wealthfront and Betterment

Jun 12, 2014 @ 9:50 am

By Trevor Hunnicutt

“This is a friggin hard business to be in,” Ron Carson told other financial advisers Wednesday.

And online portfolio managers, often pejoratively called robo-advisers, are making it no easier.

That's the view of Mr. Carson, founder of Omaha, Neb.-based Carson Wealth Management Group, and known for his reputation as a rainmaker and his coaching of other advisers. Mr. Carson's firm manages nearly $1.9 billion, according to regulatory filings. He spoke at the TD Ameritrade Institutional Elite Summit in Dana Point, Calif.

Mr. Carson joins a number of wealth managers and executives who believe firms like Wealthfront and Betterment, though small by traditional measures, are worth taking seriously.

Those executives include TD Ameritrade Inc.'s Thomas Nally, who called on advisers to reconsider fees and how they communicate their value to clients in light of robo-advisers, and Bank of America Merrill Lynch's Andrew Sieg, who credited the online firms with inspiring the wirehouse's technology strategy.

One of Mr. Carson's board members, adviser and serial entrepreneur Steven D. Lockshin, is an investor in Betterment. And Mr. Carson said he has opened an account with the New York-based online adviser, which manages $502 million for clients.

In an interview with InvestmentNews, Mr. Carson said making required investments in technology and people are squeezing profits. “My margins have shrunk considerably,” he said, “and I've got a big business compared to the average size of an RIA.”

InvestmentNews: This week at a conference for advisers, you asked people to raise their hands if they were afraid of robo-advisers. By and large, the answer was no: only a handful of people raised their hands. What about you? Are you scared of robo-advisers?

Mr. Carson: Absolutely. It's a real threat because of the increasing demand and the desire to serve that demand. They've attracted a lot of smart money to that industry. And they're figuring it out. I was at a conference and a couple of advisers sat on stage and they said: “It's no real threat. These kids, they think they want to use a technology platform. But they're going to want a human being in the end.”

I don't think so. I mean, on our consumer panel, these young kids said: “I want my information 365 days a year. If it's 3:30 on Christmas Eve, I want to know how I'm doing. I want the latest information on it.” And most of us are not providing that to them right now.

InvestmentNews: You've said there's a problem with the way advisers charge fees because they provide more “alpha” on financial planning than investment management. Can you explain that?

Mr. Carson: We create way more value on doing, for example, an estate plan [than with investment management.] I'm working with someone right now, we're going to save them $50 million [with tax-and-estate planning]. It takes a lot of [investment] outperformance to create $50 million.

Yet they're beating me up on the financial-planning fee we want to charge them. But they're going to pay me 100 basis points to manage $120 million. And that's okay. Beat me up. Because I'm going to make all my money on the asset-management side of the business. [One hundred basis points is equal to 1%.]

InvestmentNews: Some suggest the industry reform the widely used, asset-linked fee structure. What do you think?

Mr. Carson: I've a heard a really interesting idea. One adviser breaks everything out for his clients. He says, I'm going to charge you 50 basis points on asset management and if you want a quarterly meeting [and other services, I'll itemize it.] Effectively, if they want everything, and it's a $200,000 account, they're going to be paying 2.5% a year, but then all of a sudden when they start, “Oh, that's what it costs to provide that,” then they can pick and choose what they want and customize the relationship.

And I think that's the direction we're all going is that ultimately you're going to have to know what the P&L is on each of the services that you provide.

Provide it to the client. And give them the choice. For example, I've suggested the idea of having a relationship that is more online versus coming in, sitting down and having a meeting because that takes a lot of my resources to do that.

But if you're willing just to do it through email and through my commentary that I send out, and I really don't have to talk to you very often, if at all, I'll charge you a lot less. You're probably comfortable with that relationship if you're one of the young professionals out there.

InvestmentNews: How does this issue affect how you see other firms, like the ones you might consider acquiring?

Mr. Carson: So far it really hasn't. The smaller offices we're bringing in, they're just struggling to even show value. Because they've been charging 100 basis points on top of a mutual-fund-wrap fee and a lot of them have dramatically underperformed. And so they're like, “Man, clients are questioning how am I adding value, and I really don't have a real answer.”

InvestmentNews: What's your advice for advisers preparing for a robo-future?

Mr. Carson: If, in fact, you are just providing a mutual-fund wrap and you're sitting down with a client and you're shooting the bull and you're helping them with some of their basic stuff that they need. The traditional adviser, they're going to do that for a while. But the marketplace is moving at such a speed that you need to invest in your technology.

If you're unable to do that, then you should try to merge into a bigger firm that can provide those services, because otherwise, I don't think you'll survive in this business. I don't think you'll be in business 10 years from now.

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