Countless books and movies have been written about the point at which computers shift from being our friend to becoming the enemy. For financial advisers, the battle lines are being drawn right now.
Over the course of our careers, computers have helped elevate the services we provide to clients and have driven down costs, but something new is happening right now. Private equity firms have been pouring tens of millions of dollars into robo-advisers that have been gathering momentum. There have been several funding announcements in the past few weeks alone. These are computer-powered solutions where the adviser is being replaced by an easy-to-use machine. We are at an important intersection, like the one faced by travel agents in the '90s with the rise of smart technology (Expedia, Travelocity and Orbitz).
RISE OF THE MACHINES
Computer as adviser started with Financial Engines (an appropriately named firm if ever there was one) and has expanded more recently to firms like Personal Capital,
Betterment,
Wealthfront, SigFig and LearnVest—some of the robo-adviser firms that have recently raised capital. There are two burning questions every adviser should be asking themselves, even if they simply want to nurse their lifestyle business while they enjoy the cash flow:
1. Is this a passing fad?
The public markets have already spoken. Consider Financial Engines, a firm with only 900 employees, revenue of $240 million last year and a market cap of $2.25 billion (source: Yahoo Finance) and compare that to LPL, a firm with over 13,000 advisers, $4.2 billion in revenue and a market cap of around $4.5 billion.
Yes, that's not a typo: Financial Engines has half the value of LPL, but only 5 percent of the revenues and a tiny fraction of the workers.
The bet that many
private equity firms are making is that the success of Financial Engines will be replicated outside of the 401(k) world. There is a mad scramble to back one of the nascent business models run by smart, Ivy League-educated people, most of whom have never actually worked with a client directly. Almost none of these firms have any real assets under management, nor any meaningful revenues, and yet valuations are amazing by any traditional measure. But make no mistake, these private-equity firms haven't lost their sanity.
These are incredibly smart investors and they know what many advisers don't: It's already happened in industry after industry and the blueprint is very predictable. These robo-advisory firms will succeed by serving a younger, less desirable and underserved client with very low costs, do it in scale, and then as they improve and evolve, they will start taking share from traditional advisers. It's called disruptive innovation. It is just beginning. This battle is going to force everyone in our industry to rethink the way they work, what they charge and what their real value is to clients. It has already started with early adopters (that you probably don't even notice) and will reach a tipping point in the next few years.
2. How will it affect human advisers?
These new well-backed competitors are going to drive pricing down, especially for investments. Some of these firms already provide managed portfolios with regular re-balancing for as little as 15 basis points and
financial planning for as little as $500 per year. I can imagine most of our readers rolling their eyes and saying that they don't care, but they should. Why should a client pay you ten times as much for a managed portfolio?
Financial advisers come in all shapes and sizes; if an adviser is more like a product salesman, simply providing access to canned investment solutions, then they will be commoditized like Amazon punished traditional bookstores. They will struggle to find new clients and suffer brutal price compression. Those advisers are the most vulnerable to the shift. However, if an adviser is more like a lawyer, providing judgment and personalized guidance over clients' entire financial lives (not just investments), then the shift will be less painful. The problem is that most advisers today charge for investments rather than for the guidance clients really value.
A decade from now, the winning teams will be the ones that have real people empowered by rampant use of technology, replacing their yellow pad with the iPad — what we call the digital adviser.
RISE OF THE DIGITAL ADVISER
The single most important gauge of valuation in a service business is revenue per employee. Most firms are capped at 250 clients per adviser and have a small support team. Imagine how you would serve a thousand clients without increasing your staff or reducing service. How would you do it? That's the challenge that the digital adviser of the future will need to conquer. Delivering scaled personalization is the key to winning.
When the stakes are high, people will always want the judgment of another person (if only to have someone else to blame), but sadly so few advisers have built their business to cater to that need in a modern way. The digital adviser will computerize many aspects of the client experience, building replicatable, technology-enabled systems that enhance their clients' entire financial lives in a price-conscious and scalable way.
Investors, both private and public, are making a bet today that self-directed technology companies are more valuable, have better businesses and better prospects than old-school brick-and-mortar advisers. They will be right unless some of us take a new road that integrates technology into every aspect of our core business to make us more powerful. The battle is here. Long live humans!
Joe Duran is chief executive of United Capital and the bestselling author of “The Money Code: Improve Your Entire Financial Life Right Now.” Follow him @DuranMoney.
