Communication is key to robo-advisers' plans to keep their clients on track in a downturn

Digital firms warn investors so a correction down the road doesn't hit them as a shock

May 25, 2017 @ 1:55 pm

By Liz Skinner

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(Getty Images/iStockphoto)

Editor's note: This is part of a series looking at how the advice industry is getting ready for the next market correction.

Digital advisers and firms that combine computerized advice with some live help have attracted more than $83 billion in client assets over the last eight years while U.S. stocks have stampeded along.

These young advice firms, though, have not been around long enough to endure a serious market downturn, and digital naysayers like to suggest a correction will send their clients scrambling to an advisory firm full of humans waiting to hold their hands.

Robo-advisers argue that it doesn't take fingers to help investors make the right decisions when markets move. They're using technology and consistent communications to continually prepare clients for volatility, spreading their messages through many different forms, including emails, podcasts, text messages, social media, videos and blogs.

"In communicating with clients, the robos are actually superior to human advisers," said Joe Duran, founder and CEO of United Capital.

He said the digital platforms are frequently sending out well-written, logical and easy to understand pieces and reaching the investor wherever that person wants to receive the information, as opposed to human advisers responding to or making individual phone calls.

These technology-driven firms also use analytics to see which clients are viewing their accounts more often during volatility, and they can be sent targeted emails, much in the spirit of an adviser tending to know a few clients who are likely to freak out and need a call if the market dips.

While the messages emanating from digital firms vary, their mission is the same: Help prevent clients from making bad decisions when markets dip. Today, that includes warning investors what their experts are reading from market signals so a correction down the road doesn't hit them as a shock.

(More: Robo-advisers and human advisers adopt each others' biggest advantages)

"We put strong emphasis on education," said Maria Bruno, Vanguard Group's senior retirement strategist. Vanguard Personal Advisor Services, a digital platform that makes live advisers available to clients, has $65 billion in client assets.

Vanguard aims to project a consistent message — stay the course and tune out the noise — whether clients are reading a blog from Vanguard CEO Bill McNabb or a 140-character Tweet from @Vanguard_Group, she said.

Mr. McNabb wrote in a March 22 blog that "Vanguard's outlook for global stocks and bonds remains the most guarded in 10 years, given fairly high stock valuations and the current interest-rate environment."

The Vanguard digital platform is the largest of the overall digital advisory market, which Cerulli Associates estimates was about $83 billion at the end of last year and projects will grow to approximately $385 billion by the end of 2021.

Personal Capital, which has about $4.3 billion in assets, also warned clients about the equity markets' extended run-up.

Craig Birk, Personal Capital's executive vice president of portfolio management, said one of its recent quarterly market updates to clients noted "it has been an unusually long bull market run and that, while stocks go up more than they go down, they do both."

Personal Capital has seen little emotional over-response during the minor market fluctuations that have occurred in recent years.

In fact, digital advice firms have seen continued growth in customer accounts and net deposits, even after some volatility in August 2015 and the first few weeks of 2016.

"Appropriate communication is key to ensure client comfort," Mr. Birk said.

(More: Financial advisers must adapt quickly to competition from robos to stay in business: CFP Board)

Betterment, which provides human advisers for clients who elect to pay more, agrees.

It manages more than $8 billion in its retail, retirement and adviser divisions.

"One thing that is proven is that you can't predict what the markets will do," said Betterment spokesman Joe Ziemer. "We constantly work to keep customers focused on the long-term through content, in-app tools and the design of our product."

Previously, the firm also took short-term action that it said was to help protect investors.

Betterment last June delayed trading for more than two hours to guard its investors from market volatility following Great Britain's surprising vote to leave the European Union.

At the time, some in the industry criticized Betterment for not letting retail clients know about the trading halt. Advisers who use the digital tool with clients were informed.

Having live financial advisers available to clients, as some of the digital platforms do today, also may help these firms during a market correction.

But even that resource may not be enough "hand-holding," according to some.

Sue Glover, president of adviser technology consulting firm Susan Glover & Associates, said in a rough market the clients of these firms may not feel like talking to strangers about their portfolios.

"They may not be the warm and fuzzy, familiar voice that people really want to talk to if it's a correction," Ms. Glover said.

Mr. Duran said he doesn't think a correction will cause robo clients to abandon their advisers.

"Without being handheld, people will make bad choices; they'll go to cash," he said. "It's not that different than self-directed investors with a Charles Schwab account. You don't blame Schwab, so I don't see robos suddenly being fired."

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