What Do Real Advisors Offer Robo Advisors Can’t?

Independent Financial Advisor

Independent Financial Advisor

Rapid technology innovation has increasingly taken on a role in both strengthening and competing against traditional business. The financial world is no exception. In the past few years there has been an onslaught of digital money management sites popping up in the advisory space. “Robo advisors” aim to replace traditional advisors, just like TurboTax did to tax preparers and companies, like Mint.com, have tried to do with personal accounting. These new Robo advisors invest client money in diversified investment strategies, using sliders for goals and risk tolerance. They then invest in ETFs according to what their algorithms and calculators decide is the best risk/reward profile for the customer. Some online advisors, like Betterment – the latest company to offer comprehensive online financial advice services, are beginning to offer a whole lot more. Betterment says it differentiates itself from its competitors by offering “swipe-of-a-finger” mobile apps and sophisticated interactive dashboards, as well as financial advice and broker-dealer services. According to Wealth Professional, Betterment now manages $500 million in assets, which grew four-fold in 2013. Are Robo advisors a threat to the financial services industry and the existing world of financial advisors? “The online platforms … appear to be a great resource for someone in the earlier phases of their career,” Phil Ridolphi, a CFP licensee with Balasa Dinverno Foltz in Itasca, IL, told Financial Advisor in its April 2014 issue. Ridolphi praises their low-cost, globally diversified funds and ease of use, though he’s skeptical about how much these sites can personalize a portfolio or make complex cash-flow strategies. Many in the industry, like Ridolphi, don’t believe  Robo advisors pose a threat. Though online platforms are convenient, this is still a relationship business. The advice offered by a majority of these Robo advisors appears to be somewhat limited and you don’t get the one-on-one relationship you do with a real financial advisor, nor the individual advice on retirement, college education, estate, tax, or insurance issues. Robo advisors, however, may just catch the attention of Gen X and Y. Studies have shown they prefer to gather information online, rather than meet people face to face. Despite the different approaches, Financial Advisor reported the worry among advisors might likely be caused by the fact the websites are mostly doing it backwards – letting the algorithm choose the investments before the planner has sat down to discuss long-term and short-term goals. These strategies use neutral core investing. They can’t handle your estate planning or insurance or figure out complex cash-flow problems. All the machine does is determine the risk and long-term growth metrics. In some cases users might even be offering the software incomplete information. (Would it tell you not to invest if you had massive credit card debt, for instance?) After all, people hide things about their money. Wouldn’t proclivity be worse online if there wasn’t somebody keeping them honest? Furthermore, there is the tough love aspect of planning the machines can’t offer – the ability to fire a client living beyond his or her means. Would the algorithm tell clients they need insurance or they are paying too much in rent? Financial expert Michael Kitces believes Robo advisors will be a threat to some advisors. He wrote in his July 2012 blog, for kitces.com, the following: “The first group likely to be challenged by the Robo advisors is the subset of those who call themselves financial advisors, but are actually nothing more than high-cost product distributors who will be challenged by the dramatically lower costs of the Robo advisors and the simplicity and ease of their implementation. Such individuals, who may use the label ‘financial advisor’ but don’t necessarily offer any more actual financial advice than the Robo advisors, have been shown to do little to help clients achieve better outcomes, and may be challenged if they have to compete with the Robo advisor model. Although, in point of fact, the sales-based financial advisor distribution model is already under attack and losing market share rapidly to fiduciary, advice-centric financial planners, So in reality, the Robo advisors are more likely to simply participate in the trend, than be the cause or finish of it. “The second group who may be threatened by the Robo advisors are those advisors who actually deliver a portfolio similar to the Robo advisors, but at a higher cost – i.e., advisors charging a 1 percent AUM fee for what is ultimately a passive, strategic portfolio the Robo advisors are offering to manage for 1/3 to 1/5 of the cost. Those who still provide genuine value-added financial planning advice, on top of their investment management services will continue to differentiate themselves with their advice; however, if the portfolios otherwise are comparable, the pressure will be on to justify the remainder of the fee with a value-add over and above just setting an asset allocation and selecting low-cost indices.” In the coming years, the challenge Robo advisors will face is in keeping clients on board and invested through difficult markets. “The bottom line is Robo advisors still pose no threat to real financial advisors, who provide personalized financial planning advice. In fact, the comparison between the two is apples-to-oranges, in the first place, and the greatest potential of technology is to improve and augment financial planners, not replace them. While there is a segment of the market which will be threatened by Robo advisors – those masquerading as financial advisors while selling higher cost products, and those providing low-cost indexing with relatively higher advisory fees but little value-add – they are actually already endangered by competitive forces. The reality is the true competitor for the Robo advisors – in reaching out to people who are do-it-yourselfers reject using an advisor – are other do-it-yourself platforms, such as Vanguard and Schwab. For more information on Summit Brokerage Services, visit www.joinsummit.com or contact us at (800) 354-5528. This blog and website are for informational, educational and discussion purposes only, and the owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. 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