Robo-advisors make up a tiny fraction of the financial advisory business. Registered investment advisors oversee roughly $5 trillion in AUM, while robo-advisors currently have less than $15 billion in total. But because of their rapid growth in AUM over the past few years, robo-advisors are increasingly coming under scrutiny from traditional advisors.
Some think they are a product of a bull market. Others are worried clients will have a difficult time during the next market swoon without an actual person to guide them through the carnage. Still others have criticized the way robo-advisors build portfolio allocations and risk tolerance questionnaires. These are legitimate claims, but to me this is splitting hairs. There needs to be some context in this debate.
This is the average account and fee size for the robo-advisors:
So the average client with a robo-advisor is paying roughly $70 a year for a low-cost, automated asset management service to create a diversified portfolio along with a tax harvesting service. In the past that annual account fee would have been eaten up with a single trading commission on a terrible stock recommendation from a broker. Investors with this amount of money in a portfolio would have been preyed upon by retail brokers looking to churn their portfolio and sell them unnecessary products. This is one of the reasons for the robo-advisor’s success — they tapped into an underserved market.
How many financial advisors would be willing to take on accounts of this size at these fee levels? Not many.
To all of those people and firms criticizing the robo-advisors, my challenge to you would be to take on clients of this size. If you think you can do it better, prove it, by taking on smaller, overlooked clients that don’t have enough assets to reach the account minimums set by many financial advisors. And charge them a similar fee as well. I don’t think I would get many takers on this challenge. Most advisors simply cannot afford to to scale their business the way that robo-advisors can through the use of technology.
I understand why financial advisors are going on the defensive about robo-advisors. This is their livelihood and many think it’s coming under attack by a bunch of venture capital-funded Silicon Valley firms looking to take over the industry. But I think these fears are misplaced. Last month Bob Veres shared 3 reasons why robo-advisors are actually a good thing for the financial advisory profession:
1. Robo-advisory firms are expanding the market for investment advice. Most of the money invested in robo-advisors is coming from new money that wasn’t previously paying for financial advice before.
2. Robo-advisory firms are creating institutional platforms that will improve the economics and expand the client mix of advisory firms. All of the well-known robo-advisor firms have rolled out institutional versions of their services to try to help advisors instead of competing with them directly. There’s no reason to fight the technology these firms have developed.
3. The robo-competition will drive down custodial costs and raise service levels for advisory firms. The banks will have to compete with the technological offerings from these firms as well. This should create lower fees and better service offerings for advisors as the competition for assets heats up.
Veres concluded, “This robo-invasion is the best thing that’s happened to the planning/advisory market in decades. Let’s stop wringing our hands, and celebrate the robos among us.”
Robo-advisors will gain Baby Boomer clients, but the Millennials are the ones currently signing up in droves. Younger generations have always been ignored by the financial services industry because no one wanted anything to do with small portfolio balances. As the younger generation works with the robo-advisors and grows their portfolios over time they will develop good money management habits. This is a great thing for financial advisors that can differentiate themselves from robo-advisors because they can be there to pick off the best clients when the time comes for more personalized advice with a larger portfolio and more complicated issues.
Financial advisors need to start embracing robo-advisors instead of constantly criticizing them. First of all they’re not going away. Second of all, the technology side of the business is important and that importance will only continue to grow in the future. And finally, the robo-advisors could end up being the farm team for the major leagues for developing talented future clients.
Eventually this will be a win-win-win for everyone involved.
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