How much should advisers charge for a brand-new robo offering?

Thinking through pricing structure is an important part of the process when implementing an automated investment service

Jun 17, 2015 @ 11:20 am

By Alessandra Malito

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By now, many advisers have already settled the question of whether or not to jump on the robo bandwagon and offer a digital automated investment service. Wealth management firms that have decided to take the plunge have struggled with the important decision of how much they should charge.

Advisers have heard this many times before, but it bears repeating: If they want their businesses to survive the continued potential threat robo-advisers represent, then they're going to have to offer their own automated advice platforms. Although there are many ways in which advisers can do this, pricing is perhaps the most important consideration of them all, especially with giants like Schwab and Vanguard entering the fray and contributing to fee compression.

“Once they identify the technology that makes sense for them, priority number one is to get pricing and billing right before they begin implementing [a robo-adviser platform],” said Blane Warrene, co-founder of QuonWarrene, a financial service technology consulting firm.

While that is a good rule of thumb, there are exceptions, Mr. Warrene added, in particular for firms with constrained resources.

“Smaller advisers may be under a lot of stress to get the technology implemented to satisfy clients and to do both at the same time is a challenge,” Mr. Warrene said. “Larger firms have the luxury of resources and can map it out.

“But they do need to stop and take a breath,” he said.

Advisers are slowly adopting robo offerings in an effort to ramp up their digital presence and respond to investors' wants and needs. In the 2015 InvestmentNews Technology Study, 3% of the 234 advisers surveyed said they currently offer any sort of robo-advice. When asked if they plan to offer robo-advice in the next six-to-12 months, 11% said yes.

So if and when they do implement this type of advice, they'll be faced with tough choices.

Joe Carbone, a wealth adviser at Focus Planning Group in Bayport, N.Y., said knowing how much to charge is his struggle when offering an automated investment service for the first time.

“I think the idea of the robo platform is kind of ingenious … I think what robos are doing is only going to enhance my process when I utilize the technology that they built,” Mr. Carbone said. But, he added, “I'm on the fence on the pricing side of it.”

Mr. Carbone has a three-tiered fee structure based on clients' assets under management, but he wonders if it's fair to have this same structure when offering an automated investment service, which would serve all clients the same way. He's toying with the idea of introducing a flat fee instead, but that could cause a billing headache, because he would have to charge clients separately for the service.

Not only is the pricing model itself crucial, but so is the bottom-line price that clients will pay.

“The people I sit down with as an adviser have some sort of expectation about price,” said Robert Schmansky, a financial adviser with Clear Financial Advisors in Livonia, Mich. “Whenever I have quoted a price too low it's a turn-off for most consumers.”

It's no different when offering an additional automated platform. Mr. Schmansky offers a robo, although he hasn't seen much response to it yet, and he's not sure what to do with it.

“With pricing, we [financial advisers] are constantly changing what we're thinking,” Mr. Schmansky said. “I'm still not sure a low-cost subscription fee would be something useful for this service in particular.”

Some adviser-facing robos have suggestions.

Nick Gavronsky, the head of product for Betterment Institutional, the online automated investment platform's own adviser-facing division, said advisers should charge based on how they structure their current practice. He said that the industry has seen fee compression lately, and an automated platform certainly lends itself to reduced costs.

For example, an adviser who wants a robo platform may charge less, because they'll see that they're just as profitable but not likely not working as hard.

“It helps with profitability and helps with overhead,” Mr. Gavronsky said.

Rich Ellinger, the founder and chief executive of Wealthminder, an adviser-facing automated investment and financial planning platform that recently teamed up with the Garrett Planning Network, said he sees advisers with a slew of ideas about pricing. There are tiers of services that fold the robo into their current structures — there are subscription fees and there are even hourly models.

“At this point, it is a little all over the map,” Mr. Ellinger said.

His suggestion is a three-tiered service with a different pricing structure for each.

“It works for both parties,” Mr. Ellinger said. “If you're going to use the robo piece, most people who are trying to do that are doing so to create a lower tier of service.”

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