Do As They Do (Systematize And Automate Portfolio Implementation)

The true robo-advisors like Wealthfront, Betterment, and FutureAdvisor offer well-diversified passive strategic portfolios, generally monitored continuously for rebalancing and tax-loss harvesting opportunities, for a mere 15bps — 35bps, in a world where the ‘typical’ advisor charges nearly 1% on assets under management (AUM).

While this cost structure might imply a very simple, unsophisticated portfolio that has little cost and delivers little value, in practice the efforts to manage investment costs, match optimal asset allocations to goals and risk tolerance, automate rebalancing, and implement various forms of tax-sensitive strategies, quickly adds up to significant potential value. The chart below shows the primary value-adds (in percentages, and the additional dollar amount that would be accumulated from a $100,000 starting position over the span of 20 years) that Wealthfront communicates as a part of its marketing.

Yet the reality is that these benefits the robo-advisors offer are not necessarily unique to the robo-advisors; in reality, any advisor can create a systematized investment process that offers a series of model portfolios to clients, and then monitor those portfolios on a continuous basis for using software to take advantage of opportunities. In fact, the key areas in which robo-advisors leverage technology — automatic rebalancing, proactive tax-loss harvesting, and asset-locating investments on a tax-aware basis — have already been available to and implemented by advisors in the form of intelligent rebalancing software for a nearly decade now ! 

Of course, recent industry surveys suggest that the majority of advisors still do not use rebalancing software ; nonetheless, the point remains that advisors actually already have the tools necessary to do virtually everything the robo-advisors offer, and can do for their clients just as the robo-advisors do now! Except, of course, that human advisors are not limited to their investment offering, and have the potential to offer far more, as well.

Go Beyond Just Passive Portfolio Construction

As discussed previously on this blog, one of the powerful effects that is occurring as a result of evolving technology and the growth of robo-advisors is the steady commoditization of a well-diversified passive strategic portfolio (and investment management more generally). Simply put, if the sole value propositions you as an advisor provide to clients for a 1% fee are portfolio construction, diversification, and continuous monitoring with appropriate tax-sensitive rebalancing, your business may well be in danger for being overpriced .

Yet in practice, many (though certainly not all) financial advisors have long since been evolving their value proposition beyond just the essentials of portfolio construction. The entire growth of comprehensive personal financial planning services represents the clearest example of this trend — with the number of CFP certificants having more-than-doubled in the past 15 years to nearly 70,000 — as advisors seek to differentiate themselves beyond just portfolio construction alone.

Notably, though, most of the robo-advisors are still remarkably investment-centric in their offering, and are not necessarily focused at all on the other aspects of a client’s financial world. That’s not necessarily a knock against the robo-advisors, but simply an acknowledgement that passive strategic portfolio construction is conducive to systematic implementation with algorithm-based technology, while good financial planning goes beyond a technology solution and generally requires a more human touch, due both to the complexity of the information and the the social accountability that helps to address the challenge of getting another human being to actually change their behavior .

In other words, simply put, financial planning is the anti-commoditizer. and therefore for the foreseeable future is the anti-robo-advisor value-add as well. And the differentiator is likely to remain in place for a long time to come, because changing financial behavior requires more than just an efficient technology tool to deliver information. After all, if information alone was sufficient, the country’s obesity problem would be solved with a website that just explains you need to eat less and exercise more — yet just as that clearly is not resolving the issue, neither is it likely that a robo-financial-planner explaining you need to spend less and invest more (in a diversified and continually monitored portfolio) will succeed either. While technology tools may be able to better help us understand our position and track our progress, technology is more likely to augment human interaction around changing financial behaviors. rather than replace it, as our brains are just not hard wired to feel accountable to computers the way we do to another human being!

Augment The Relationship With Technology

Notwithstanding the uniquely human aspects of financial planning and behavior change, the reality is that technology can still be highly effective to augment the relationship and enhance communication and collaboration. and advisors have been very slow to adopt technology to augment client relationships.

For instance, just because financial planning may thrive on a human  interaction, and even a face-to-face interaction, doesn’t mean it needs to be an in person  meeting to make the connection. Sometimes, the best and easiest and most efficient way to communicate is by other means, ranging from telephone and email to the rising trend of using video communication (e.g. Skype) and screen-sharing collaboration tools (e.g. GoToMeeting). In the past, advisors have tried to make themselves more efficient by delegating work to their clients (rather than taking/wasting the time to drive to my clients, I’ll make my clients come see me in my office instead! ), but using video technology for communication in particular allows that travel time to be permanently eliminated altogether, making everyone more efficient, while still preserving a real face-to-face visual connection and the essential non-verbal communication that goes along with it. Simply put, just because there’s no way to shake hands at the end doesn’t change the fact that a video meeting is still a face-to-face meeting!

Similarly, technology provides not only opportunities for better communication, but better collaboration as well. The growing range of online financial dashboards and personal financial managers (albeit with few PFM tools currently available to financial advisors. though this may change soon!), not to mention full-powered financial planning tools that both advisors and their clients can access, create an opportunity to engage clients at a deeper level. While many advisors have been resistant to sharing their technology with clients, the robo-advisors have openly embraced it; in fact, Personal Capital gives away its financial dashbaord for free as a primary means of marketing and finding new clients in the first place, following up with those who use its free software to see if they would like more assistance to achieve their financial goals — and with a greatly expedited advice process, as the client’s information is already  fully uploaded and integrated into the software (while the typical advisor still struggles to get clients to send in data gathering forms!)!

In other words, technology doesn’t have to be an either-or robots versus humans scenario, and in practice it may be the technology-augmented humans — the advisor cyborgs — that will ultimately be the real winners in the future  (with the tools of the robo-advisor powering much of their human advisory business!).

Bottom Line For Advisors To Compete With Robo-Advisors

So what’s the bottom line to compete with robo-advisors, and/or to avoid having your business (or future growth) undermined by them? There are a few clear steps for evolution, similar to the way that advisors had to adjust as the rise of online discount brokerage eliminated the compensation of being paid to implement stock trades:

- Systematize your investment process. It’s not just to actually implement investment strategies on a more consistent basis for clients, but because the reality is that if your investment process isn’t systematized and you’re not implementing model portfolios consistently, it will be nearly impossible to leverage technology (i.e. rebalancing software) for maximal efficiency.

- Get on board with rebalancing software. Unless you just plan to give up implementing investments for clients altogether (or intend to outsource the investment management altogether ), using technology to monitor and manage client portfolios will be key in the future. In today’s environment, many advisors justify their different-for-every-client portfolios as being deeply customized for each client, but given the impossibility of continuously monitoring such portfolios effectively (not just their allocations, but due diligence on the underlying investments themselves!), the different investments for every client approach may soon be nothing more than an indicator that the advisor neglects their portfolios (at least relative to the truly continuous daily monitoring and tax-sensitive management of a robo-advisor)!

- Provide financial planning services that go beyond portfolio-only solutions (especially if you’re passive). Building a well-diversified passive strategic portfolio is on its way to being totally commoditized. and as the technology improves and transaction costs decline may even disintermediate most mutual funds and ETFs altogether , which in turn will drastically drive down AUM pricing for pure portfolio construction. As a result, advisors who wish to defend their pricing must either find other value-adds to bring to the table (e.g. including extensive financial planning as a part of their AUM pricing), or add value to the portfolio above-and-beyond mere diversified portfolio construction (e.g. have a more active investment management approach that actually delivers results, as alpha can always justify higher costs. if it can actually be delivered, of course!).

- Utilize technology to augment the client relationship. Don’t view technology as a competitor or commoditizer, but as a tool that can drive down the cost to deliver already-commoditized services and help provide them more efficiently to clients, so advisors can focus on areas where they truly add value (and leverage technology in those contexts as a collaborative tool). The investing public is already finding a wide and growing range of technology websites, tools, and apps that help them track and monitor the progress towards their goals; these are tools that advisors can and should embrace to augment their relationship, and make it even more engaging and collaborative.

Ultimately, advisors that are slow to change, and cling too long to solutions that are being commoditized (passive strategic portfolio construction) or fail to adopt technology that makes them more efficient and helps augment their relationship with clients may still find that their current clients continue to retain and stick around. After all, those clients are already accustomed to the service the advisor provides, have a relationship, and it takes a lot for a client to be unhappy enough to actually leave. But those same advisors may find themselves increasingly facing a growth wall, where their costs and efficiency make it impossible to attract new clients, as new clients are slowly attracted to either robo-advisors, or more robot-like cyborg advisors instead .