How to beat the robo-advisers

Utilize technology to make interactions with clients more efficient and on-demand

Mar 2, 2016 @ 11:59 am

By Sheryl Rowling

+ Zoom

In my last two articles, I discussed the pros and cons of robo-advisers. As they continue to rake in more and more assets, how can advisers compete? The answer is conceptually simple and seemingly difficult to implement. Advisers must embrace what robo-advisers do right and also provide what robo-advisers can't.

How can advisers adopt the positive aspects of robo-advisers? They need to utilize technology to make interactions with clients more efficient and on-demand. Investments must be made in the areas of client portals, social media, interactive financial planning, more customized online reporting, remote meetings and online communication tools.

Advisers should also focus on the value-added services that differentiate them from robo-advisers. Advisers providing only portfolio management risk losing current and future clients. Individualized offerings such as personal financial planning, goals monitoring, tax planning, insurance analysis, college funding and estate planning are now essential to distinguish human wealth management from automated investing.

Additionally, investors will now be demanding more tax management. Since robo-advisers offer tax-loss harvesting and avoidance of short-term gains (permanent tax saving), advisers not matching that will be seen as lagging. With the help of internal technology, advisers can not only match but beat robo-advisers at their own game by maximizing tax benefits.

(Related read: The top 5 robo-advisers based on AUM)

Tax-aware rebalancing software enables the basics of tax-loss harvesting (including more comprehensive wash sale protections) and short-term gain avoidance, as well as location optimization (household-level management locating particular investments in particular account types, resulting in temporary and permanent tax savings). Additional tax saving strategies are also available with sophisticated rebalancing software: tax-gain harvesting (to take advantage of zero capital gains rates) and capital gain distribution avoidance (to avoid "phantom" income from year-end mutual fund dividends).

The technology required to compete favorably with robo-advisers might seem burdensome and expensive. Yet the benefits of increased efficiency and an improved marketing position should easily overcome the cost and time involved in adding technology.

Sheryl Rowling is head of rebalancing solutions at Morningstar Inc. and principal at Rowling & Associates. She considers herself a non-techie user of technology.


How is your firm attempting to fend off robo-advisers?

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