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Robo-Advisors Revisited: The Client Still Wins

Over the last few years, the robo-advisor model has changed the landscape of financial planning.  This landscape is still evolving and the full impact of robos on the industry is still far from being understood.  What started as a simplified, cheap, automated way to manage your investments and savings has grown to a platform that offers a wide range of services and advice. Larger, bulge bracket firms continue to roll out their own robo-solutions and a wide range of robo offerings for advisors are continuing to come to market.

I previously discussed the impact of robo-advisors on the industry and my conclusion was that this impact would be positive for everyone, especially the client.  This assessment continues to hold true. Even in the short time since that post, robo-advisors and traditional advisors have begun to evolve and this evolution has benefited the client and the industry as a whole.

Robo-Advisors

At their core, I would categorize the traditional robo-advisor as a customized, tax efficient, target date fund. Mutual fund companies have been offering target date mutual funds for years. These funds adjust their allocation based on the time frame to a specific goal.  Robo-advisors have taken this concept a step further and integrated a few other variables to create investment solutions that adjust and change based on the profile and investment goals of the client. This is done at a much lower cost than mutual funds and with the flexibility to integrate more tax efficient strategies like tax loss harvesting.  However, most robos still lacked the personalization, customization and holistic approach that comes from a human advisor.

More recently we have seen a shift for many robo-advisors.  They identified that their solution only covers the investment side of the equation and clients are often looking for more than that.  There is much more to financial planning than just portfolio management.  Some of the robo-companies are accomplishing this by adding or integrating automated financial planning solutions that cover such things as budgeting, tax planning and goal tracking. Others have taken a different approach and are offering human planning options to those client that reach a certain asset threshold. Betterment, one of the early standalone robo-advisors, has taken this approach. They recently announced that they would give their clients an option to have access to a human advisor for a slightly increased fee.  This follows similar announcements from Charles Schwab.

Human Advisors

Human advisors have traditionally offered portfolio management services as their core solution. Other financial planning strategies were also offered but most advisors differentiated themselves by their investment acumen. The introduction of automated investment solutions was a direct attack on this traditional value proposition.  As a response, we have seen a major shift from the traditional, human advisor.  Rather than challenge the new robo model, human advisors have embraced it to help improve their own client offerings.  Advisors are integrating various robo-advice solutions into their practices to streamline certain tasks.  This frees up their time to focus on a wider breadth of service offerings, expanding their value proposition away from just investment management to many other tertiary services.

Rather than serve as an impediment to growth these robo-technologies can and should be used to increase efficiencies for advisory practices.  This will lead to more efficiently run practices that have a better ability to service and communicate with their existing clients while also having more time to focus on growth.

I think this trends in the human advice industry will continue and we will see the emergence of three types of human advisory firms.  There will be one group that decides to continue to focus exclusively on investment management. They will live and die based on their investment performance and continually be forced to justify their investment value and fee structure.  There will be a 2nd group that will embrace a wider offering of financial planning solutions. They will utilize some robo-technologies and look to expand their value proposition outside of just investment advice. This will be the bucket most firms fall into.

I also see a third type of firm emerging out of this.  I like to call this group “Concierge Advisors.”  This offering goes beyond just offering financial planning services.  These practices will provide full outsourcing of all financial aspects of a person’s life. The offering will look very similar to a family office service. This type of offering used to be reserved for a small group of high and ultra- high net worth clients but with the efficiencies that come with the integration of robo-technologies this type of offering will be available to a much wider group of clients.

The Client Still Wins

Overall we have seen a convergence of robo-advisors and human advisors.  Robo-advisors are moving away from just offering robo-advice, integrating a wider array of advice solutions and even a human touch. Human advisors are integrating more robo-technology into their own offerings and expanding their planning solutions. I don’t see the two models meeting right in the middle but looking out to the future I think most clients will be serviced by a combination of human advisors and robo-technologies. As was the case when I originally wrote about this topic, the big winner in this entire debate is still the client.  The client now has more options, lower costs and a more streamlined client experience.

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Financial Planning for the Modern Client: 5 Keys to a Successful Relationship

Financial planning relationships have changed a lot over time.  In the past, an investor would contact a broker (or be cold called by one) and place a trade in return for a commission.  Sometimes they may not even speak with the same broker again. While these types of relationships still exist there has been a major shift away from this model to a much more holistic approach. Advisers spend much more time learning about their clients and providing advice based on this knowledge.  But the modern client is beginning to demand even more from their advisers. It’s not just about creating a financial plan and meeting a couple times a year anymore.  The modern client is looking for something much more integrated with their lives and aligned with their ever changing goals.

Advancements in technology over the past decade have changed the way advice is delivered, clients are communicated with and how financial planning practices operate.  In the beginning, these improvements were an extra value add for the client.  This, however, has evolved, especially for the modern client.  The use of technology is now an expectation and not just a value in itself. The way the technology is utilized and how advisers use it to simplify their clients’ lives is the real way value is added.

So what is the modern client looking for from their financial planning relationships?

  1. Simplicity: In a fast paced world, modern clients are looking for ways to simplify various aspects of their life. This is where the use of technology is essential to streamline the client experience and remove roadblocks from the process.  This stretches across all aspects of the relationship:
    • Communication: Clients want to easily be able to communicate and share information securely with their adviser. Be it through emails, video calls, client portals or other online document sharing systems, clients want to communicate with their adviser on their terms in the easiest way possible. It is not just about the quarterly or semi-annual meeting anymore.
    • Access: Clients want to be able to access their information and accounts simply, securely and easily from anywhere. It doesn’t have to be a granular deep dive but they want to be able to see what is going on when they want to.
    • Processes: Opening accounts and performing other routine tasks shouldn’t be a laborious process. Clients don’t want to spend all their time dealing with getting things done, they just want them to get done.
  2. Expertise: While technology has made many processes and advice much easier to obtain, the modern client still wants a level of expertise from someone that knows and understands their situation.  Robo-advisors have been able to replace some of this advice for certain clients but wealthy clients still desire to work with someone that understands the human side of their situation.  Client needs can’t all be boiled down to simple algorithms so the modern client still wants a level of expertise that goes beyond simple investment planning and model portfolios.
  3. Value: With technological advances, certain advice has become much easier to obtain and at a much cheaper cost. This has forced a lengthy discussion about the cost of financial advice in the industry. However, what I have found is the modern client isn’t as worried about overall cost as they are about value. Clients do not mind paying a fee when the value they are receiving in return exceeds that cost. While it is expected that fees will have to come down over time, we are also seeing an increased value being provided by advisors and desired by clients.
  4. Time: Or better put, the modern client is looking for time savings. They do not want dealing with their finances to be a time consuming burden. They want to be able to outsource the time consuming aspects of managing their finances so they can focus on more important things in life.
  5. Education: While the modern client is looking to simplify the financial parts of their life they are also looking to be informed about what is going on. They like to understand the whys behind various financial decisions or advice. They are not necessarily looking for a deep dive into every position they own but they like to have a basic understanding of what is going on and why. Part of this stems from the true desire to understand while a large part stems from the scars left by the last financial crisis and the perceived mistrust of the financial industry as a whole.  They don’t want to just take all advice at face value anymore.

While not all modern clients embrace all of these areas and there are many other things individual clients are looking for. The main thing I see from the modern client is a shift in expectations of their relationship away from what has been traditionally provided by a broker to a relationship that is more integrated into their lives.  Barriers of communication and access to information have been broken down by technology and the modern client isn’t just looking for this, they are expecting it.

Robo-Advisors Vs. Traditional Advisors: The Client Wins