The robo advisor’s place in an advisor’s practice

Posted by James Capps on June 7, 2017

Call it a fad, phenomenon or natural evolution, but the truth is, “robo advisors” are gathering assets fast. Around $50 billion are currently managed on digital advice platforms and, by some accounts, robo-managed assets are projected to top $2 trillion by 2020.

The low ticket to entry and the ability to interact with the online tools 24/7 are the primary attractions for investors. With no minimum balance to establish a robo advisory relationship, low fees, and the ability to get digital advice and make changes anytime from their smart phones has made robos an attractive alternative, especially for younger investors.

Automated portfolio services merge DIY finances with traditional, professional advice. Some sites provide options to check-in with a live advisor for a small extra fee. A few are even specializing – targeting particular demographics like women and millennials.

And it’s not just younger people who are embracing the digital advisor. One study has shown that one in four older, wealthy investors use digital resources and also pay a financial advisor.

If it is unwise to fight the popular trend toward digital investing, perhaps advisors can make their practices more competitive by integrating digital virtues with their work as a personal advisor. By enhancing their services with the right digital tools, advisors can become more efficient and relevant, while still maintaining their specialization and personal service.

Enhancing efficiency

To compete with digital investment trends, advisors should look for technology that increases efficiency. Programs offering automated workflow procedures, notifications and model-based management can help. Advisors using support from digital investment solutions can then actually invite lower-asset accounts and maintain profitability as time spent on management is reduced.

Adding a digital solution can also be part of the advisor’s overall transition to outsourcing money management. The digital advisor can be designed to channel clients into one of several pre-determined asset allocation mixes. Some firms put their own brand on a platform, or white-label, to access performance reporting and automated rebalancing. Careful research before partnering, however, is recommended because platforms differ in management strengths and fees.

Preserving relevance

As younger clients enter the investing pool (with potential to become larger clients), it’s important to stay relevant to their desires for contemporary systems. Wealth is shifting to Generation X and millennials as they mature to higher positions in the workforce and, more significantly, inherit assets from Baby Boomer parents. Advisors face a challenge to retain this next generation of investors.

With the advent of online automated platforms, the ability for an investor to view his or her accounts at all times is becoming an expected feature. Finding a tech portal with that capability is key. Clients entrusting their money to someone (or something) also like to see exactly what they’re paying for. Advisors are wise to increase transparency in fees and how they are providing ongoing value.

Delivering specialization

As they develop a digital solution for certain clients and corresponding services, advisors might implement lower fees for these services and then cover their costs by charging higher fees for specialized services. Indeed, when it comes to specialized services like financial and estate planning, elder care and tax advice, nearly 50% of investors prefer traditional financial advisors, according to a study by the Financial Planning Association. The advisor’s fees can then be closely aligned with the services offered.

Maintaining the human touch

Personal attention delivered by traditional advisors is still valued higher than cheap, quick, direct-to-consumer computer advice. Although younger people tend to have a higher level of trust for robo advisors than other investors, only 10% of all investors surveyed by market research firm GfK said they would trust a computer algorithm more than a human to give financial advice. And 45% of consumers said they would not forego live customer service even if it meant paying less.

The investing public appears to understand the personal relationships’ role in money management. Computer algorithms may offer objectively logical strategies, but a proactive, client-focused advisor can talk investors through long-term plans and help them stomach volatility.

Financial advisors need not panic over photos of robots cropping up on financial blogs. For many clients, digital investment solutions work best when paired with personal attention from a live advisor who can go beyond quick, cheap algorithms and offer comprehensive counsel.

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