We are witnessing the beginning of a fusion between financial advisers and technology, which are coming together to be more competitive and offer holistic solutions to a broader range of clients.
This robo-advising or digital advisory is not just here to stay, but growing in importance. The financial services industry has been slow to embrace technology in client service: it has not been easy to go from simple questions to the high-quality execution investors require, and deserve. The result is an exciting new generation of online products that can help advisers better serve clients — if they embrace them.
This should free advisers' time to allow them to broaden and enhance their roles, to move beyond asset allocation to become true wealth managers. Technology promises to aggregate additional types of assets: insurance products, savings accounts and more. Aggregation is very time-consuming, and so is execution. Digital advisers can enhance the focus on holistic financial planning, which is complicated. This should help advisers spend more quality time with clients, offering a more personal touch and greater attention.
Growth in this area is being driven by three key trends:
• Value creation is shifting: Robo technology demonstrates the primacy of a user-friendly front end in the overall value proposition for clients. In this wired, go-anywhere, 24/7/365 world, planning and ease of use are becoming key drivers in the disintermediation and democratization of advice delivery.
•Functions are rapidly commoditizing: Mid-office functions such as portfolio construction and account management, as well as back-office components like platforms and processing, can be executed faster and easier with new technologies. This should decrease costs. We ignore these shifts at our peril.
•Clients are benefiting: More people are getting better advice, including some who are accessing financial markets for the first time. As technologies improve, advisers adapt, and firms create new, integrated solutions, existing investors should also reap benefits.
It should surprise no one that many, many people want to use the Internet to keep track of their financial investments. We have been slow to give them the tools they want, but many product options are coming out that promise to close those gaps. Most are targeted to B2B needs, rather than direct-to-consumer B2C offerings.
The adviser is and will remain the primary conduit through which asset management firms reach investors. These systems can draw asset managers that have digital advisory and advisers closer together in serving end-user clients.
The good news is that robo-advisers are opening the markets to new types of clients, especially those who previously had no access to traditional investment advice.
Even advisers will admit that some clients are underserved, particularly those with smaller accounts. Robo-advisers offer services that can help these smaller accounts grow larger. The goal is to meet the demands of these clients for greater information and guidance, even if they largely end up making their own choices. This can ensure that the time they do spend with their adviser is more effective.
Giving clients access to the substantive information they want, when they want and in the way they want it is the best way to serve them. Crafting high-quality online portals that offer advanced capabilities can provide a strong competitive advantage. Moreover, the absence of such a portal may be enough to drive clients to surf competitors' sites – and will they want to stay once they have gone elsewhere?
Regulatory changes are at play, too. Designing solutions that seek to meet the Department of Labor's fiduciary duty standards can offer significant enhancements while reducing costs to smaller and midsize advisory firms, which may not have the resources to build their own compliant systems.
(Fiduciary and robos: Robo-advisers and the challenge of fiduciary advice)
Robo-advisers are further democratizing the financial advisory business by expanding the population of those who can offer advice and those who can use this advice.
“Technology” usually brings to mind young people and their go-go desires for information. But when their needs and preferences are considered, the result can be a powerful draw to older investors and their far larger accounts. Clean design, simple execution features and easily understood, plain English fact presentations are attractive to lots of investors, of all ages. Many robos are also simpatico with mobile technology, allowing advice to go anywhere, anytime.
So robo-advice can enlarge the advisory business as a whole, expanding the pools of both providers and users of advice. With a robo concept, anyone can offer investment advisory services: insurers, banks, trust companies, discount brokers, etc. In essence, anyone with access to clients could offer an investment solution, and it could be scalable.
Whether digital advisers are doing it right, let alone perfectly, at this stage in their development – from which they are poised to take off, quickly – is moot. They will continue to improve, offering increasingly impressive substantive information that clients can easily understand and act upon.
At the very least, by providing digital advisory services our industry can offer far better advice than many investors might get surfing the Internet on their own. That will help them make better decisions. A good digital experience as part of an adviser's offering can help reinforce to clients that their best choice is to seek the experienced, expert counsel of their financial adviser.
Thomas Hoops is head of business development at Legg Mason. Roger Paradiso is head of alternative distribution strategies for Legg Mason.