Beating the Robo-Advisor Challenge: How to turn personal service into a decisive advantage over self-directed investment websites

By May 7, 2014Guest Article

By Cynthia Stephens, ByAllAccounts Vice President, Marketingbaa_logo_current

How does today’s advisor counter the emergence of robo-advisor websites, which provide investors with a set of self-directed investment tools, and eliminate much of the cost of traditional advisory services? This article examines how the human element remains the differentiating factor that can give traditional advisors a distinct competitive advantage over technology-only solutions. Whereas robo-advisors can provide instantaneous analysis of performance return metrics, it is only the human advisor who can personally “get to know” an investor—and provide value-added wisdom and advice at the key moments when investors are most in need of guidance in making wealth management decisions, such as marriage or divorce, or planning for retirement and/or succession, or transferring assets to the next generation.

This differentiation must take into account that we do live in a technology-driven world, and it is the forward-looking advisor who offers personal, event-driven counsel AND tech innovations such as account aggregation and client portals—in effect, offering the best of both worlds. Add the statistically-validated fact that the majority of investors actually prefer human advice at key life/investment moments (even investors who make most of their own investment decisions, and/or Generation X and Y investors)—and a clear vision emerges for advisors who seek to enhance their positions as “financial quarterback” and achieve even greater levels of success.  

Beating the “Robo-Advisor” Challenge: How to turn personal service into a decisive advantage over self-directed investment websites

At first glance, it looks like a major competitive threat to traditional advisory practices: automated websites that provide self-directed investors with many of the tools they need to plan and execute their investment strategies—without the assistance or wisdom of a human advisor. However, when you take a closer look at these new, technology-driven websites—now known throughout the industry as “robo-advisors”—you begin to see that for all their utility and functionality, they lack the human element that has always been such an essential part of making investment decisions. This isn’t a simple “let’s bash technology” argument: when you examine the attitudes of today’s investors, including younger Generation X and Y investors, you find a statistically-validated preference for human advice when it comes to making important investment and life decisions.

The changing landscape and the rise of self-service tools for today’s investors

Let’s back up for a moment and examine what the robo-advisor phenomenon is all about. It’s not just about the ability to use a suite of easy-to-use, analytic investment tools that give investors access to all their financial information online.  Rather, it’s about an investor making choices as to proportionality: how much investment planning do investors wish to entrust to their own skills at using these tools, versus how much do they wish to rely on the best judgments and advice of live, human professionals? At one end of the spectrum (see chart), you have total technology sites such as SigFig and FutureAdvisor, in which investors have no contact with an advisor, and do everything themselves. Then there are the Covestors and Learnvests of the world, where advisors communicate with investors, but purely through technology—namely, the web. And finally, there are hybrid solutions in which established financial services companies such as Vanguard and Edelman Online have enhanced their online service offerings to the point where they, too, can serve as robo-advisors. BAA1 Many of these robo-advisor entities are private companies that are recent start-ups—and because of the momentum they have generated in terms of investor adoption and AUM, many observers seem to think there is an air of inevitability about them. According to the conventional wisdom, we have reached a point in the evolution of investing where the pure technology play is poised to push aside the human component. This Darwinian outlook arises, in large part, from the fact that robo-advisors are generally a more cost-effective option for investors than human advisors. By cutting out the “middle-man” between an investor and his or her investments—namely, the advisor who recommends an investment, executes the trade and then monitors performance—an investor can greatly reduce fees and save a significant amount of money over the long term. This cost reduction may be having a particularly powerful effect on younger investors, who as a matter of course, have come of age expecting advanced technology and lower fees.

Traditional advisors respond—and the table stakes get higher

Of course, it’s not an all or nothing proposition. As investors have been exposed to new technology solutions, they have come to expect that their long-standing advisors should offer them tools that are comparable in convenience and ease of use to what robo-advisors are making available. In many cases, traditional advisory firms have been more than happy to comply. The implementation and use of client portals, for example, has become de rigueur for established advisory firms that wish to adapt to the changing marketplace and remain on the leading edge of client service. These portals—which provide a holistic view of a client’s portfolio, often with data feeds from diverse sources—are now becoming the new table stakes in the advisory game. They enable advisors and clients to quite literally “be on the same page” during an advisor presentation, get a consolidated view of client assets, assess comparative data, and ultimately collaborate in real time on analyzing documents and making important investment decisions. This trend will only accelerate in the years ahead, and will be heightened by the proliferation of mobile devices and the ubiquity of anytime, anywhere access to tools, data, news, and communication channels.

Tools alone don’t tell the story, because most investors still seek human advice

Even as technology advances at a dizzying pace—and even as “tech phobic” investors become more and more comfortable with innovations such as client portals—the fact remains that technology only goes so far. Research from Spectrem Group’s online publication Millionaire Corner shows that when we track “advisor dependency” within various wealth segments, it becomes clear that the majority of investors still seek the guidance and sense of perspective that comes only from interacting with a human advisor. BAA2 That’s not to say they always want an advisor’s guidance on which investment strategies to use. They don’t. Consider the large swathe of investors who are classified as Event-Driven. Even though these investors make their own investment decisions most of the time, they still prefer to turn to advisors for assistance at key junctures in their personal and investment lives—marriage or divorce, for example, or retirement and/or succession planning. These events may occur suddenly, without warning—or they may have been anticipated for quite some time. (See also an interview with Millionaire Corner President Cathy McBreen: What Wealth Investors Want Most (and Aren’t Getting) from their Financial Advisors) In either case, these investors are looking for something that the robo-advisor sites can’t offer—namely, the wisdom and experience of a human advisor who personally knows the investor, and who is able to leverage this connection into a personalized recommendation that transcends the sheer numbers crunching of investment analysis. Often, the advisor may know the various members of the client’s family who are being affected by the wealth management decisions being made. That knowledge is incredibly important, and may make the decisive difference in formulating a plan. Or the advisor may have had firsthand experience in helping other clients through similar life/investment events—and gleaned hard-won knowledge that he or she is happy to pass along. Traditional advisors will stand-out from robo-advisors in this scenario. And once you add in the responsive service and attention to detail that a human advisor can contribute—you can see the merits of a one-to-one client-advisor relationship. (And turning back to the chart for a moment, there are also the Advisor-Assisted and Advisor-Dependent categories, both of which are “advisor friendly” constituencies.) So…we have two variables in play now: the investors’ preference to utilize new technologies (even if not at the pure self-service level of a robo-advisor), and the desire for human investment advice at key moments in the decision-making process. But there is still a question to be answered…

But won’t tech-savvy younger investors swing the balance to robo-investing over time?

Not according to the studies we’ve seen to date. SEI Research Insights shows that Generation X and Generation Y investors are at least as likely as their older counterparts to be willing to pay for advice from an advisor. It also serves to explode the myth that younger investors are totally averse to paying fees and will opt for the automated, less expensive solution every time. Not true! BAA3 (Percent who agree with the statement: “I am willing to pay for advice regarding my investments.” Source: SEI Research Insights) Having said this, it’s important to reiterate that the use of technology is not a black-or-white proposition. As traditional firms adapt account aggregation, client portals, web conferencing, online meeting scheduling, and so on—they will still offer clients the advantages of receiving personal investment advice. It’s easy to see a future where a firm’s technological and human elements are blended into a cohesive offering that guarantees the best of both worlds. This, then, is the new advisory formula for success…

The new paradigm: Combine the “best of tech” with the “best of talk”

One approach for today’s advisory firm is to impress upon clients and prospects that it doesn’t simply offer an investment planning alternative to robo-advisors—it does something that robo-advisors or technology in general simply can’t do: it guides clients and their families through the event-driven life decisions that impact (and are impacted by) the accumulation and preservation of wealth. For example, can technology give thoughtful advice on the well-planned transfer of wealth to the next generation? How about answering client questions about the financial and emotional impact of health care planning and elder care? What about getting assets in order for the sale of a business? Clearly, the answer is “no”—technology has its limits. For all their precision at slicing and dicing performance return metrics, and for instantaneously providing an array of algorithm-driven services, robo advisors are a partial solution that can’t replace the quality advice offered by humans for humans. The key is for firms to provide the best of both worlds—superior technology AND expert, personal guidance. That’s the way to remain relevant and competitive—to turbo-charge your practice, in effect—and to fend off the challenge of technology-only solutions such as the robo-advisors who are now on the scene. It is enterprising advisors who offer the “best of tech” and the “best of talk” in order to maintain themselves as the financial quarterbacks of the client’s investment affairs. These advisors will attain and preserve their place as the “go to” person when client questions arise or decisions need to be made—not necessarily in every instance, but at key points in the client’s investment lives. They’ll be the trusted individuals who have the patience, persistence and long-term view of the market that are necessary to succeed—and whose expertise will be augmented, but not replaced, by the latest technologies. Cynthia Stephens is the Vice President of Marketing for ByAllAccounts, a Morningstar company, a provider of innovative data aggregation technology for financial applications.   The content of this article has been provided by ByAllAccounts and has been reproduced here with its permission.  Such information does not reflect the views and opinions of Orion Advisor Services, LLC or its affiliated companies (collectively, “Orion”).  Orion does not endorse any particular third-party product or view.  Our clients should undertake their own assessments to determine whether these third parties meet their business and due diligence requirement. 0202-OAS-5/7/2014


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