Outside voices and views for advisers

Running an advisory practice in the age of the robo-adviser

Using online platforms to outsource compliance and back office responsibilities can help advisers focus their time

Oct 16, 2014 @ 8:00 am

By Charles Sizemore

Here's a novel idea: Advisers might actually need to earn their advisory fees in the years ahead. With the arrival of online financial planning sites like Mint.com and online investing marketplaces like Covestor, a real in-the-flesh adviser has to offer something more than generic, packaged advice if they are to convince a skeptical investing public to pay them.

While this might feel threatening to some advisers, it shouldn't. Yes, the rise of the robos commoditizes entry-level financial planning. But it also allows advisers to scale their practices and to focus their energies on higher-valued services. Used correctly, digital adviser platforms can also be used alongside social media and traditional news media as a powerful marketing tool.


The internet has flattened industry after industry over the past 20 years as technology has eliminated traditional gatekeepers. First, Napster and its successors destroyed the economics of the music business, leaving Apple and its iTunes software to pick up the pieces with an entirely new business model. Then, Amazon.com disrupted the business of bookselling twice — first, by cutting out the traditional brick-and-mortar book store with home delivery, and second, by eliminating the paper book altogether via the Kindle. Netflix is in the process of revolutionizing TV and movie distribution.

Today, the financial services industry is undergoing a revolution of its own. Discount online brokerage houses continue to replace traditional full-service brokerage houses and the wide availability of free or inexpensive high-quality investment research has made brokerage research — ostensibly what you are paying for from a full-service brokerage house — far less valuable. The decline of the traditional broker-dealer transaction-based model has led to the rise of the RIA advisory-based model. Now, even this model is being transformed by automated “bots” that handle basic planning and portfolio management.

(Related read: Technology's role in keeping RIAs ahead of the disruption curve)


Rather than fight the rise of the machines, I embrace it. I run several of my investment portfolios on the Covestor platform and make my trades and performance available for the world to see. Some might say that I'm giving away the secret sauce — and indeed, an investor could essentially piggyback on my trades for free or with only a very minimal investment.

Guess what? I'm counting on it.

The most important elements in building a client-adviser relationship are trust and credibility. By posting my portfolios online — and by posting regular commentary on my blog and via social media — I help to establish both while building name recognition. A potential client can get to know me by reading my work and by following my models with only a modest portion of their portfolio. They can follow me anonymously, which is an attractive selling point to a generation of investors that has grown desensitized to sales pitches, marketing letters and cold calls. When you produce quality content, the readers find you; you don't have to pound the pavement looking for them.

(More: 5 lesser-known client trust builders)

The internet has spawned the “freemium” model in which a consumer gets to try a basic, scaled-down version of a product in the hopes that they will upgrade to a higher-end paid version. It may seem discouraging to an adviser to give so much of their intellectual capital away for free in the hopes that a follower might pick up the phone and call. But if you provide value, the clients will follow. It's a long game that requires consistency and commitment. But it works.

There are other practical reasons to embrace an online platform. Sometimes, it is impractical to take on smaller clients, no matter how much you might want to. Each additional client involves fiduciary responsibility and a sea of compliance paperwork. If time is money, taking on smaller clients can actually be a money-losing proposition. This is an area where online investing marketplaces are a godsend. If a prospect with a modest account size comes to me for help, I can refer them to one of my Covestor portfolios rather than turning them away. They get essentially the same portfolio management, and I avoid the time-consuming back-office headaches.


Finally, I want to highlight a major opportunity that robo-advisers offer to in-the-flesh advisers. By effectively outsourcing much of the compliance and back office responsibility, it allows the adviser to leverage their time and focus on the higher value-added aspects of building a practice. Every minute not spent dealing with new account paperwork and routine trading is a minute you can spend being more responsive to your clients, whether that means meeting them face to face or simply looking for better investment opportunities on their behalf.

Charles Sizemore is the principal of investments firm Sizemore Capital and the author of the Sizemore Insights blog.


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