Robo-Advisors Vs. Traditional Advisors: The Client Wins

There has been a lot written over the last few years about the rise of the “robo-advisor.”  Dozens of new companies have been formed in an effort to automate the financial planning process and appeal to millennials.  Hundreds of millions of dollars of venture capital money has been invested in these companies and we have recently seen a number of larger, traditional financial institutions take large stakes in some of these new companies.  So what does this mean for the financial industry as a whole?  Is the traditional broker/ financial advisor model dead or dying? And who will the eventual winner be in this battle for assets?


The rise of the robo-advisor has shaken up the financial planning landscape, at least in the headlines, over the last few years.  It is the buzzword on the streets and comes up often in meetings with clients.  The low fees, low minimums and simple client interface appeal to the younger generations of investors.  There is also a draw to be doing something different than their parents.  Even with all this hype, from an asset standpoint, robo-advisors are still just a drop in the bucket.  According to data published by Corporate Insight, online financial advisors had an AUM of around $21 billion at the end of Q2 2015 (the largest, Wealthfront, has around $2.6 billion). To put that in perspective, Fidelity alone manages over $2 trillion in assets and JP Morgan around $1.7 trillion.  So while the large firms aren’t quite shaking in their boots yet, the interest that the robo-advisors are generating sheds some light on how the next generation wants to be interacted with and served.

Robo-advisors are very beneficial for certain types of clients. Investors that are just starting out, with very basic financial planning needs, looking for a simple way to invest without having to devote much time to it can greatly benefit from these streamlined services.  I often encourage people I meet with that may not qualify for or need our comprehensive services to start saving through a robo-advisor. They will receive much better advice than if they were doing it themselves and it helps to instill some saving and investing discipline.

The biggest positive that is coming out of the expansion of the robo-advisor is they are making it easier for people to start investing. Encouraging many, that would normally just be putting money in a checking account or spending it, to start saving. This increased early participation is good for everyone, including traditional financial advisers.

Traditional  Advisors:

The traditional financial advisor isn’t going anywhere anytime soon.  With more baby-boomers retiring every day, the demand for high quality advisors has never been greater.  Wealthy individuals still want to speak with a person that understands the “why” behind financial decisions and can help quantify the emotions behind investment decisions. That being the case, the role of an advisor, how they are compensated and what they must do to prosper is continuing to evolve.

Over the past few decades we have seen a major shift from the commission based broker to the fee based advisor.  With the influx of discount online brokers, trade execution has been commoditized and brokers were/ are being forced to adjust their value proposition to better align with the needs of their clients and still be compensated for their expertise. (Whole books have been written about this topic so I will not go deeper into it but I feel it is important to acknowledge this as a precursor to robo-advisors before proceeding)

While robo-advisors are not currently a major threat to traditional advisors, they are laying the seeds for the next shift in how advisors operate.  They are forcing advisors to reassess their value proposition and figure out other ways to differentiate themselves.

There are going to be a few outcomes to this shift and a few things that advisors can do now to capitalize on this shift:

  • Implementation of robo-technologies themselves: Advisors need to embrace these new technology solutions and use them to better serve their own clients, streamline their own operations and reduce costs. Technologies exist to increase operational efficiencies and client communication.  These will become the norm and not the exception.
  • Don’t just focus on investing: Just as trading was commoditized, certain investment advice is also being commoditized.  The advisors that are going to succeed will focus on more than just investing, taking a comprehensive approach to their clients’ financial lives. These other areas are just as important as the investment side but often overlooked. (Michael Kitces of Nerds Eye View touches upon this in his blog)
  • Improve client information flow: Traditionally, clients spoke to their advisors at annual/semi-annual/ or quarterly meetings with an occasional phone call to fill the gaps. Clients now want on demand access to their financial lives.  Improvements in the way clients can access their financial lives and advice will be essential for advisors to succeed.
  • Increase value/ reduce fees: Advisors will have to increase their value to clients or be forced to reduce their fees if they want to continue to compete. Robo-advisors have proven that simple investment advice can be provided cheaply so unless advisors can increase their overall value they will be forced to reduce their fees.

Everyone’s a winner, especially the client:

So who is the real winner in this robo-advisor revolution?  Both models have their place in the market but the Client is the real winner in all of this.

The robo-advisor model has proven that there is a market for low cost passive investing.  Basic investment advice can be commoditized at a low price and give everyone, no matter how wealthy, the ability to save toward their goals in an efficient manner. I expect assets to continue to flow into this arena, especially as some of the larger companies get involved and can more easily scale their offerings.

Current market penetration data has also shown that the traditional financial advisor does not need to go out and start posting their resume any time soon.  With such a large market of baby boomers, more and more people trying to retire every day and tax/ estate planning laws continuing to get more burdensome, there is a huge opportunity for advisers. However, for these advisors to continue to provide the best service to their clients, differentiate themselves from the low cost robo-advisors and reach the next generation of wealth, they need to provide more than just investment advice to justify their value. They need to provide comprehensive planning solutions and have to make their offering more accessible to an ever modernizing client.  Those advisors that can adapt to these changes in the market will continue to prosper.

The outcome of all of this is more investors, better client communication, an improved client experience and better access to investment solutions. In either case, the client is the big winner.