Robo-advisers want to plan your clients' future

Behind the scenes, robo-advisers are quietly hatching plans to compete more aggressively with flesh-and-blood advisers

May 24, 2015 @ 12:01 am

By Alessandra Malito and Mason Braswell

Like most disrupters, robo-advisers don't mind being underestimated. In fact, they're counting on it.

When the latest iteration of automated investment services first appeared on the scene in the late 2000s, it was summarily dismissed by detractors as a fad — a ridiculous, albeit inevitable, byproduct of investor overconfidence brought on by a prolonged bull market.

The idea that consumers would turn to mathematical algorithms for investment advice was laughable. In fact, at an industry gathering in 2014, a human dressed as a robot took the stage and announced plans to replace financial advisers.

“I am Robo-Adviser,” said the fake robot in a robotic voice. “You can call me at 3 a.m. I never sleep. I will manage your money.”

The audience, which was made up of mostly financial advisers and technology vendors, roared.

In the end, however, it may be robo-advisers who have the last laugh.

Helping investors to decide how to allocate their assets is just the start for robo-advisers. In some ways, low-cost investment advice is the Trojan horse to get investors — and financial advisers — comfortable with the idea of digital advice.

Behind the scenes, robo-advisers are quietly hatching plans to compete more aggressively with flesh-and-blood advisers. Wealthfront, the nation's biggest pure automated advice platform with $2.3 billion in assets, just hired the former design director from Facebook Inc. to help it better understand how design can help influence user behavior.

Robo attack?

They're going to dislodge and disintermediate unskilled and mediocre financial advisers.— Elliot Weissbluth,  founder of hybrid advisory firm HighTower Advisors

Robo-advisers are also pouring tens of million of dollars into developing mathematical formulas and behavioral maps to enable them to move into areas advisers have long considered immune to automation: retirement planning, trusts and estate planning and helping clients react to life's major emotional events.

“Robo technologies are going to have a profound impact on the industry,” said Elliot Weissbluth, founder of hybrid advisory firm HighTower Advisors. “They're going to dislodge and disintermediate unskilled and mediocre financial advisers.”

And, if history is any guide, they'll do it at a fraction of what traditional advisers charge.

“There's a huge opportunity for us to do more,” said Jon Stein, founder and chief executive of Betterment, a robo-adviser with $2 billion in assets. “We have a real lead [over other robo-advisers], and we have a more thoughtful roadmap because we are thinking about advice and planning."

Financial advisers, for their part, are warming up to using automated investment platforms themselves. About 8% of top advisory firms — that is, firms that fall into the top quartile of RIA firms measured by overall revenue, assets under management and revenue per staff — now offer some sort of robo-advice, with another 20% expected to do so in the next two years, according to the soon-to-be-released 2015 Elite RIA Study by InvestmentNews Research in partnership with BlackRock.

These firms, according to the report, typically view robo-advisers as a way to attract younger, less-affluent clients, including the adult children of existing clients.

Analyzing advice

Robo-advisers are betting that clients' financial lives can be evaluated and analyzed in the same way actuaries incorporate risk and longevity into mathematical calculations. They're also betting that advances in technology will someday allow them to duplicate the experience of working with flesh-and-blood advisers.

“In as little as two years we're going to be blown away by the technology that just continues to evolve and improve,” says Deborah Fox, chief executive and founder of Fox Financial Planning Network. “Most advisers who don't evolve their firms to leverage the new investment tech, as well as repricing within the next couple of years will, at best, have a hard time winning clients and, at worst, begin losing clients.”

Traditional advisers could find themselves butting heads with a digital version of themselves sooner than expected.

Betterment, for example, just released its retirement planning software. The software, which was developed by a team of holistic financial planners and a Ph.D. in quantitative and behavioral finance, aims to ask questions that real-life advisers would ask of pre-retirees. Based on their answers, it calculates whether the investor is on track to meet his or her goals.

Eventually, the software could get into more detail, asking questions such as whether the prospect is a smoker, for instance, as it factors in longevity in retirement planning or considers life insurance recommendations.

(Related read: Find your inner robo)

Just the beginning

More complicated tools — such as estate planning features — are still in beta testing, but are set to be rolled out in the next five years, according to Mr. Stein.

FutureAdvisor, another robo-platform with $600 million in assets, began offering free college savings plans and help transferring money to children, as a way to entice new customers to sign up for its platform.

Meanwhile, United Capital, a wealth management firm with about $14 billion in assets, is spending millions to develop software that will transform clients' answers to questions into a comprehensive financial plan. All in less than 30 minutes and without speaking to a real-life adviser.

“You're going to have a different experience, but you can do it all without an adviser,” Joe Duran, the firm's founder, said.

The stakes for financial advisers are high.

You're going to have a different experience, but you can do it all without an adviser.— Joe Duran,  founder of United Capital

At the end of 2014, assets held worldwide by robo-advisers totaled $14 billion, a small fraction of the total advice market. That figure, however, is expected to reach $255 billion in assets in just five years, according to a study from

If that sounds farfetched, consider that Financial Engines Advisors, which is widely viewed as the original robo-adviser for the way it automated retirement savings, has amassed about $100 billion since 1996, making it the nation's largest fee-only registered investment adviser, according to InvestmentNews' annual ranking of RIAs.

Big money is riding on the success of the robo-advice movement. Indeed, Betterment and Wealthfront have received a combined $235 million in backing from some of the same Silicon Valley venture capital firms behind Twitter Inc., Uber Technologies Inc. and Instagram.

Consolidation ahead

That money is going to come in handy. The early success of many robo-advisers in attracting assets, coupled with the fact that the barriers to entry in the automated advice arena are low, has brought many formidable competitors to the market. Well-established firms as Charles Schwab & Co. and Vanguard have recently launched robo offerings.

As a result, the industry — which, in its current form, is less than a decade old — is already ripe for consolidation.

“You're going to see five to 10 large national firms: United Capital, Wealthfront, Vanguard, Personal Capital, Betterment, [et cetera] that will come from a different direction and end up in the same place,” Mr. Duran said.

Firms that survive that consolidation will do more than offer basic asset allocation services. They will likely offer long-term planning and advice through some combination of automation and flesh-and-blood advisers. That could mean full-time advisers for ultra-wealthy clients who want to pay for additional concierge services, and call center advisers for everyone else.

George Kinder, long considered the father of holistic financial planning and the founder of the Kinder Institute of Life Planning, agrees that most investors will utilize both robo- and real-life advisers during the trajectory of their financial lives.

“Investors will go through a robo adviser and use it as far as it can carry them,” he said. “Then when they find technology issues, or personal issues, that don't feel resolved, that's when they'll search out who has the best qualifications and they'll go to them.”

Not a be-all end-all

To be sure, robo-advisers are unlikely to put real-life financial advisers completely out of business. While robos may do a good job of asking questions that would determine whether an investor would benefit from long-term care insurance, analyzing the various options for that insurance may be best left to a human, said David Canter, head of practice management and consulting at Fidelity.

“There are certain things an automated service can do in terms of flagging issues, but then there's a lot of follow-up and implementation,” Mr. Canter said. “At least today, that's where there is a lot of value the adviser can provide.”

It remains to be seen how today's robo-advisers will evolve over the next five to 10 years. One thing is certain, however: the services they offer will go far beyond helping clients invest in the markets.

Their ambitions are far greater than that.


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