After four years of remarkably calm markets, we are finally experiencing meaningful turbulence. In that period of relative calm, robo-advisers blossomed from an interesting idea into a potential threat to the status quo for advisers.
One of the most common perspectives I hear is that a declining market will reveal the underlying weakness of the robo-solutions: they have no real people to help clients. The hope is that clients will abandon digital advisers in a tough market. But is this an accurate assumption? What if market weakness also reveals the frailty of many human advisory firms?
My belief is that just as the 2000 tech bubble collapse did not end the expansion of online travel sites, a bear market will not kill the digital-adviser revolution. Let me share why I believe we are in the midst of a structural change that is unavoidable and why a market decline might in fact accelerate the change:
1. Clients' portfolios behave like the markets, whether managed by people or machines. We do secret shopping at all of the major online solutions and we also complete in-depth research on hundreds of large independent advisers. The reality is that in our landscape, there simply aren't many portfolios out there that deviate greatly from the general market over a full market cycle. Unless investors are shifting underlying allocations accurately, it's likely most of your clients are experiencing similar pain as those investing with a robo.
2. You are probably not communicating as frequently or as effectively as the robos. The communications sent by Wealthfront, Vanguard, et. al., to keep people calm are timely, well-written, logical, easy to understand in several forms (written, audio and video), and they are omnipresent. They are not just reaching out on websites and email, but on Twitter and other social media platforms. These firms even track open and read rates. Meanwhile, many independent advisers are busy responding to singular phone calls and eventually scrambling to write, review and share their own thoughts via an email. Few know how many of their clients even read their thoughts.
3. In a lower return market, costs become more important. As market returns drop, costs and fees become more important. There is no debate that no human adviser can match pricing of machines to deliver scalable investment solutions. If clients cannot clearly explain why they pay you what they pay you and whether you are worth it, it becomes harder to maintain the connection if alternatives exist. The longer markets deliver mediocre results, the more clients will focus on costs. Remember, most robos didn't exist as a viable alternative in the decline eight years ago.
ARE YOUR CLIENTS CHEATING ON YOU?
How many of your clients are testing the waters? In other words, are they taking a small allocation and trying out some of the cheaper alternatives? Just as many clients apply their advisers' suggestions on their 401(k) for free, the same can easily be done with their other investible assets.
Why is this important? Because you could be holding your clients' hands on their entire life, but only being paid for managing the assets you manage. That means they can take half their assets to a robo or custodian, save half of their fees, but get all of your “hand holding” and advice for their entire portfolio for half the price.
So here are some questions you have to ask yourself:
• Are you getting paid for assets outside of your management?
• Do your clients pay you for your financial guidance and planning in addition to your investment acumen?
• Do your clients view you as the consolidator and center for decisions on their entire financial life and do they pay you for it?
So what happens next?
The robos will integrate more people to advise and personalize account relationships. However, they will do so with massive scale, creating national bionic solutions that resemble what Vanguard is doing; qualified but low-cost certified financial planners providing financial guidance via video conference and centralized investment management. As a secret shopper, I can share with you that the experience is remarkably pleasant and really dynamic. It also goes well beyond investing and taps into the client's entire financial life.
We independent firms will have to pivot in the direction of the robos: technology enabled, charging for the financial guidance that involves the human element. We will need to create a dynamic, engaging and omnipresent financial life management experience. In the meantime, we can still say one thing that a robo can't say: “If you have any questions, call us, we know you and we're here to help you, one person to another.”
That just might not be enough in a few years. Regardless of what the market does.
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.