By Diane Harrison Technology advances have infiltrated every corner of finance, including the world of wealth management. While few can argue with the positives of automated, algorithm-based portfolio management platforms, the advent of the cost-efficient, dispassionate robo-advisor has struck fear into the heart of many a financial advisor and fund manager, who see these technology options as a threat to their business practice. Full-service wealth management has survived the birth of discount brokerages and the online trading boom. It will survive the latest influx of robots, whose advantages will eventually mimic each other to the point of being indistinguishable. One thing about robot advisory platforms is that they’re entirely passive from the end user’s point of view. They ride the market. They don’t outperform. They aren’t emotional. However, they don’t call the client. They can’t respond to specific questions. They can’t form any sort of relationship with a client and be a resource to them for a range of life-planning needs beyond investment performance. They will never replace full service wealth management, though they can be a resource within this business. FIRST, WHAT ARE SOME BENEFITS OF A ROBO? Lower fees. Most of these robo advisors charge less than 1%, with some south of .20%, versus the standard investment advisor fee range of 1-3% on a client’s portfolio. This difference alone can make for a slight outperformance over traditional investment services for many individuals. Lower cost of entry. In addition to being economical from a management fee perspective, oftentimes the robo platform will allow for client portfolios to be as small as several thousands of dollars, versus a tenfold or higher threshold for traditional portfolio management accounts. Elimination of emotional trading. With a robo advisor executing a passively managed program, there is no chance of active management decision-making being affected by human emotional reaction to markets. Index-like performance with tax efficiencies and global access. Most robo platforms feature ETFs that aim to produce results like an index, but with lower expense ratios than their equivalent counterparts found in mutual funds. For individuals focused on low cost but benchmark performance in a portfolio, a mix of ETFs can be a desirable option long term. THIS WILL NEVER BE AUTOMATED These advantages are certainly attractive, and wealth advisors would be foolish to deny or ignore their existence. Why not acknowledge such benefits and work to blend them into the customer service model as a modern investment option for a range of solutions? If these advisors would see the robo advisor as a tool and not a threat, it could yield benefits to their advisory services and work to enhance, not erode, their client relationships. Successful traditional investment advisory practices have always focused on providing sound advice over the long term that solves a host of client goals and needs. Many studies have been conducted citing the fact that households utilizing a sound investment advisor amass much more, almost a factor of three, of assets than households who go it solo. The successful financial advisors serving these clients have been able not only to win their clients over, but more importantly, retain this clientele over years or decades, often across generations. And the secret sauce to this success? A continued practice of listening to the clients, defining their needs and wants, and constructing customized, flexible wealth management solutions that adapt with the client’s evolving goals, including tax and estate planning. A robot can never work with an individual to translate someone’s stated needs and wants into a dollar amount that will accomplish that financial plan and create such a program to get there. This plan typically includes a strategically-planned for range of risk-taking investments that, in combination, produce an overall portfolio picture consistent with the client’s wants. For portfolios of substantial size, typically in the 6 figures or higher, this will include some niche strategies and alternative investments not currently represented by robo-advisor platforms or index products. Advisors and fund managers who inhabit this space have nothing to fear from the robo except for a lack of knowledge about the value these components bring to a portfolio; a communication problem for another day. Embrace the future and include the use of robo platforms when and where they make most sense from a total financial picture for all clients. These technological algorithms will never replace the human desire for trusted interpersonal relationships coupled with solid investment planning. They can execute a portion of the client portfolio investment goals and assist in keeping overall fees in check, but they will never invade the domain of interpersonal communication, customized planning or portfolio course-correction management value where all strong advisors earn their keep. Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets. She has over 25 years’ of expertise in hedge fund and private equity marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables. 2018 AWARD WINNER: Acquisition International's Sustained Excellence in Specialized Marketing Communications - USA | Corporate Insider's Excellence in Marketing Communications – USA. 2017 AWARD WINNER: Global Fund Awards 2017 Financial Services Marketing Firm of the Year - NY, USA | Corporate Insider Business Excellence Awards 2017 Financial Marketing Firm of the Year - USA | M&A Insider Awards 2017 Financial Services Marketing Firm of the Year - USA | Corporate LiveWire Innovation & Excellence Award 2018 shortlisted. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.
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