There's no question robo-advisers are trending. The big guns are in, and a new entrant seems to launch monthly. The question for advisers to ask is, what does the future hold for robos? Having worked for 20 years in the TAMP industry, I see similarities between our experience with turnkey asset management platforms and the current robo evolution.
Twenty years ago, I joined forces with a group of financial professionals, and we began helping advisers help clients. We focused on what we believed to be the most critical part of portfolio construction — asset allocation. Pivoting off the Brinson study, we began to link the independent adviser with investment committees from top-tier firms. Sound familiar? It should, because robo offerings like Betterment and Charles Schwab & Co.'s Schwab Intelligent Portfolios share the same emphasis on modeling and academic prowess.
In fact, Schwab bases their asset allocation theory around the Brinson study, and Betterment utilizes a similar model called Black-Litterman that was created by Goldman Sachs just five years after the Brinson study published. We also shared the same focus on ETFs. The concept is not new; a TAMP released the first publicly traded ETF models more than 10 years ago.
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The timing of the TAMP and robo launches are also eerily similar. Like the robos launch in today's market environment, we too launched our business model at what were then market peaks. In the heady days of the late '90s, clients were discussing how much they could make, not how much they might lose. They were giddy with yearly gains and the promise of an organized way to make even more was met with open arms. Firms like Janus and Fidelity were the robos of that era. It wasn't what asset class or country to buy; it was whether you owned Janus 20 or Magellan. The only question then was, as it seems to be now, what do I need the adviser for?
THE TAMP PAST AND ROBO FUTURE
When TAMPs arrived at the scene, advisers jumped on board to enhance their offerings. They sold the value that TAMP models could provide to their clients by focusing on the appropriate risk model, the ability to hold multiple funds in one account, and the combination of strategic allocation with the more nimble aspects of tactical modeling. Our first generation of TAMPs prospered and clients responded to their advisers' being on the same side of the table. It was clear sailing ahead.
The dot-com bubble of 2000-02 actually promoted the TAMP-adviser partnership. With many fund families' track records destroyed by the tech wreck, advisers opted for managed portfolios with less or no history, again emphasizing institutional and academic prowess. Clients yearning for help responded well and the business thrived. Imitators were everywhere. Three became thirty, and thirty became hundreds of TAMPS.
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Then, 2007 happened. The financial crisis brought massive changes and a vital awareness. Suddenly, market cycles mattered as much as models. The hunt was on for survivors, and those that made it through had something other than modeling or academics. The message was clear. It cannot only be about science, there needs to be an art as well. Clients and advisers opted for the most active approach — a combination of both storyline and execution. The clear TAMP winners created a vision for the client where both their adviser and the strategy would never let it happen again.
The TAMP response to the crisis varied. SEI added tactical and alternative options to their modern portfolio theory modeling. This was a major departure for a firm whose position was always that tactical allocation had no merit. Loring Ward redoubled its focus on helping their advisers and started to join platforms where the strategic only firm could be coupled with more satellite, active allocation approaches. AssetMark, then Genworth, launched a very successful “rowing and sailing” campaign adding large numbers of highly tactical models and also began to introduce liquid alternative solutions. Clearly, these were the right moves. These three firms have all bounced back from potentially crippling AUM drops and have regained leadership roles in the industry.
Because of their focus on academia and launch in a thriving market period, robos will be affected by a market dip. The industry will need to refocus, and a select few will rise from the ashes. When competing with a robo, remember the story of TAMPs, and explain how asset allocation is a combination of science and art. We learned from our experience in the TAMP space, so let's wait and see what the robos learn.
Gary Manguso is the vice president of product strategy at FTJ FundChoice.