While B2C robo advisors have yet to reach asset levels that could threaten traditional advisors, their innovative technology has been spurring firms to revamp their online presence. A Roboadvisor Renaissance has spread across the formerly stodgy wealth management industry. Legacy technology vendors are rushing to revamp their user interfaces and add automated investment offerings to meet a rush of client demand.
Companies that previously divided client-facing systems across different departments are now consolidating everything in order to standardize and improve the overall client experience. By all measures, automated investment platforms have changed the industry for good.
The roboadvisor panel session at InVest 2016 focused on the role of automated advisory platforms and their future in the industry. The panel was moderated by Suleman Din, Managing Editor of Sourcemedia, which hosted the event.
- Joe Duran, CEO, United Capital
- Jon Stein, CEO and Founder, Betterment
- Mike Sha, CEO, SigFig
- Mitchell Caplan, CEO, Jefferson National
Robos Took the Market by Storm
The early popularity of the automated investing platforms is hard to dispute, and yet this stat from Mike Sha surprised me: 90% of SigFig clients did not have an advisor before signing up with SigFig. This can not be chalked up to just Millennials, since the average age of SigFig clients is late 40’s, Sha reported. That is consistent with Betterment's client base: 70% are not Millennials.
Roboadvisors stepped in to fill an underserved gap in the market and provide a just-in-time solution on consumers' terms.
Duran, whose firm reached $16 billion in AUM this year, made the point that the financial advice industry is lodged in the dark ages when it comes to consumer experience. Many advisors do not speak the language of their clients. Couple that with clunky client portal technology and the appeal of the sleek robos becomes clear. A highly interactive interface, ease of use and access, and lower fees make these platforms rather attractive. It is true that robos do not provide holistic financial planning advice, but neither do many traditional advisors.
This is slowly changing as automated platforms continue to iterate and incorporate feedback from their clients, many of whom are asking for lite financial planning tools.
The founders of financial planning startup, Advizr, anticipated this trend and designed their software to provide basic financial planning tools to financial professionals that are not planners. While they do not provide an investment platform, they have been busy signing partnership deals to distribute their software. Firms such as XY Planning Network, Blueleaf and Genpact OpenWealth have all recently announced agreements with Advizr.
The true usefulness of the automated investment technology is that is has forced a re-assessment of the value that advisors add to clients. If an advisor simply resells financial products or delivers a portfolio similar to Betterment at a higher price point, why shouldn’t the client ditch the brick-and-mortar professional for an app?
B2C robos were off to an impressive start in 2010. However, as Michael Kitces observed recently, the growth rates of the purely B2C automated platforms have slowed down because of the mismatch between relatively high client acquisition costs and relatively low average client revenues. Does that spell death for robos? Not quite. The ultimate impact of the technology is in its ability to power and scale traditional advisors – not replace them.
While no two portfolios are exactly the same, the average rate of return across invested portfolios can be fairly consistent. So, the raw rate of return is not the only factor that matters.
According to Stein, who recently helped Betterment raise $100 million Series E round of funding, the end result of financial planning is a function of how much the client is saving, how he is dealing with taxes, and what his behavior is. All three of those factors can be controlled with better advice delivered through a combination of technology and human interaction.
An average client needs more of that. Based on the May 2015 report from the Government Accountability Office, half of households over 55 have no retirement savings, and the average monthly income from retirement savings is a meager $310. Can technology help?
Automated Savings Drive Success
In an article earlier this year, I have observed that Acorns, a quiet and non-assuming automated savings app, has been making quite an impact with growth that could hit 2 million users by the end of 2016. The Acorns app links with subscribers’ credit cards and bank accounts and rounds each transaction up to the nearest dollar. The change is invested in a portfolio of EFTs. In the words of Acorns' co-founder Jeff Cruttenden, people find it easier to part with $1 fifty times than to part with $50 all at once.
Betterment is also using its automated platform to nudge clients towards beneficial behaviors. The platform allows users to set up to three goals (for example, a safety net account, a retirement savings account, and a vacation fund). Subscribers can set up a time-triggered auto-deposit, or use the new Smart Deposit feature where an algorithm identifies excess cash in the checking account and suggests a savings deposit. According to Joe Zeimer, Betterment’s Director of Communications, 60% of customers use auto-deposit, which increases savings.
As anyone who has ever made a New Year’s resolution to lose weight or save more money can testify, automating good habits can be highly valuable. However, in any automation there comes a point when the human can override the system out of fear, boredom, or lack of discipline. Then what?
The ability of technology to keep clients from making bad decisions is about to be put to the test. Numerous studies have shown that an average investor is not good at making investment decisions. As Duran put it, the advisor’s key role is to provide discipline for clients.
The Motley Fool reported that over the 20 year period ending in 2008, S&P500 average returns amounted to 8.35% per year, while investors made just 1.87% a year. Left to their own devices, most investors will act on impulse, buy high and sell low, and have a very short memory – not great ingredients for managing a retirement portfolio.
Automated platforms use a variety of algorithms to place their clients in the portfolio that is most appropriate for them. For example, Betterment asks for the subscriber's age, retirement status, and annual income as the three inputs for calculating recommended portfolio allocations. Riskalyze has a more detailed questionnaire that dives into individual risk tolerance preferences.
Based on Betterment’s recommendations, a user in his 30’s may get a mix that is heavily weighted towards stocks. As much as 90% of his overall balance could be highly reactive to a market downturn. A traditional investor might reach out to a client to offer a steady hand, but what will the robos do?
That is a critical question in today's market, between Brexit and the uncertainty of the upcoming election. Pure B2C platforms have not had to deal with a protracted and dramatic market downturn yet, and it will be interesting to watch what happens to their AUM as the stock market becomes irrational.
Riskalyze has rolled out a tool called “Check-Ins” to help gauge client anxiety in times of high market volatility. Others use the frequency of client log-ins as a proxy for judging client sentiment. The trouble is that the accuracy of the self-reported data depend on the clients’ willingness to admit discomfort.
Website log-ins may not be an accurate measure of discomfort for users who have “ostrich syndrome” and avoid checking their accounts during downturns. For them, the lack of log-ins is a reflection of unwillingness to face the facts, not of high levels of confidence.
It seems that the answer is at the intersection of technology, analytics, and human involvement. An advisor who can spot a potential issue and coach a client through the choppy market is worth his fee and more.
Technology Adoption Trends
Interestingly, the statistics offered by both SigFig and Betterment back up that trend, with most assets attributed to the 35-50 year old users. Wealthfront reports that their typical user is in his or her 30’s. That is good news for the automated platforms, since older users typically have greater savings. The adoption trend also signals the degree to which automated investing is becoming “normalized” – at least for the segments that have a relatively straightforward financial situation and are not facing immediate retirement.
Nearly 60% of investors on Schwab's Institutional Intelligent Portfolios are over 50, but 40% of new investors on the platform are under 40, according to comments made earlier by Neesha Hathi, Schwab’s EVP for investor services platforms. Their client base may be pushing Schwab's platform to a tipping point as they already have 550 advisors and $7 billion in AUM.
— MichaelKitces (@MichaelKitces) June 17, 2016
Technology has always had an impact on human labor as parts of jobs or entire work processes are automated. As Michael Kitces correctly pointed out, advances in automated portfolio management tools, such as rebalancers and cash management, have slashed the amount of manual work required by back office staff to support advisory managed accounts.
Yet, United Capital's Duran believes that the industry is still wildly overstaffed. This could be partly due to the efficiencies and processes he has introduced at his firm. His goal has been to emulate Starbucks such that every client interaction is standardized. This helps to ensure a common client experience no matter which UC office you visit.
Roboadvisor Renaissance Increases Need for Human Advice
Fully automated investing is well and good – until retirement looms close and the market hits a snag. Older investors tend to appreciate and demand more holistic advice because their financial and personal situations are usually more complex. This is where an advisor with a complete balance sheet approach and an ear for hearing client concerns has an opportunity to elevate client experience.
— Jimmy (@jimmymoock) June 17, 2016
That does not mean robos have no use for more complex clients. Technology is giving advisors tools for creating create scale and efficiency, and empowering clients to make better decisions – a win on both sides.
In my opinion, robo advisors are just a small piece of the larger fintech puzzle. Data aggregation, artificial intelligence, and the convenience of apps can make the client experience personal, relevant, and timely. Technology and upgraded advice have the potential to elevate the industry as a whole, shifting it out of the caves into sunlight. An industry solution that is scalable, smart, and highly responsive to client needs and preferences would indeed be a good thing.