How to Respond to the Robo Advisor Threat


August 15, 2016

Since the industrial revolution, there has always been a sense of fear with every new technology. Some of that fear is processed through science fiction; think of the infamously detached HAL-9000 in 2001: A Space Odyssey. And the potential impact of computer technology is constantly widening. In the past year we’ve seen people balk at Jeff Bezos embracing the use of sophisticated Artificial Intelligence or at Elon Musk musing that all of humanity is a computer simulation. But in many ways, these sorts of comments are still thought experiments and navel-gazing.

For the Wealth Management industry, though, the real threat – which has been mounting for some time – is the ongoing rise of Robo Advisors. In many ways these robos are scarier than malevolent computer programs in The Matrix or killer robots in The Terminator, because they present a clear and present danger by displacing the status quo of Wealth Management as it has been operating for decades.

It’s not all doom and gloom, however. As disruptive as Robo Advisors can be, their threat is not insurmountable, nor is their disruption inevitable. Traditional wealth management firms have a choice to make: to sit pretty and allow robos to slowly siphon more and more business from them as their clients pass the baton to a younger generation, or they can respond with their own innovation and adapt to the future. Below, we’ll outline not only why Robo Advisors are still a threat, but how you can respond to them.


Why Are Robo Advisors Such a Threat?


Robo Advisors have barely made a dent in assets under management compared to the share that traditional wealth management firms possess, so why are they so important? It’s not just because of their lower prices or innovative value propositions; it’s because their growth hasn’t slowed down. In fact, it’s still ramping up. Betterment, Wealthfront, Folio, and many more, have been quick to attract Millennials – the digital natives – with their less expensive services and well designed client onboarding processes.

Robos charge fewer fees and are more open to smaller investors (either drastically reducing the minimum balance required for an account or requiring no minimum at all); they’re more convenient, offering mobile access and sleek, easy to use websites; and, perhaps most importantly in the long run, they make viable investments that deliver consistent returns.

How Have Firms Responded to the Robo Threat?


Many firms are creating hybrid models, such as Charles Schwab and Vanguard, both of which developed new services which allow their advisors to make significant use of algorithms and robo technology. Other banks and investment firms are taking the plunge too. RBC is partnering with BlackRock’s FutureAdvisor, and Wells-Fargo is planning to launch their own Robo Advisor in 2017. Even UBS’s American wealth management division invested in the Robo Advisor SigFig earlier this year.

It’s worked out well for Charles Schwab thus far, as their robo service just passed $8 billion in AUM in the last two years, surpassing Robo Advisor Betterment, while Vanguard Personal Advisor Services has $41 billion in AUM.

And many are watching Fidelity, who launched Fidelity Go in July 2016, a digital service with a $5000 minimum and one of the few that charges an all-in fee (most services charge for management and investment fees). And rather than using algorithms, Fidelity Go relies on a human team of investors to build and rebalance portfolios.

These banks and wealth management firms are taking an active response, adapting to the challenges of the fintech world and showing that they are willing to change and look to the future.


It’s Not Just Millennials Anymore


Traditional wealth management firms’ biggest advantage over Robo Advisors, like Wealthfront, is their advisors. This doesn’t mean you can neglect creating a digital strategy in the hopes that your clients will continue to gravitate towards your firm simply for a human presence. Robo Advisors’ ability to offer comparatively drastic price reductions will continue to put pressure on traditional firms and drive down the market price.

Also, a few years ago you may not have been too worried that the robos were appealing to the younger generation because you were in secure in your client base of Baby Boomers and Gen X and you could wait until the Millennials outgrew and left the Robo Advisors. But the numbers are only getting worse. Only 29% of Millennials have talked to a financial investor, and but now the older clientele is beginning to slip away too. An E*Trade Streetwise study reveals that the majority of investors aged 25-34, 34-55, and 55+ all want their advisors to have a strong digital presence rather than relying solely on the advisor. As the service expands and is further integrated into the lives of potential investors, it will be the firms who are able to innovate and rapidly capitalize on these new technologies who will appeal the most to new clients.

You Need to Take the Necessary Steps to Develop a Holistic Plan


It’s becoming increasingly apparent that firms cannot sit idly by and wait for the robo threat to fade away like just another fad. It’s serious competition that requires a constantly evolving business model to keep pace with their convenience, speed, and cost-efficiency. Citigroup Inc. released a fintech report earlier this year which mentioned that “we believe the services offered by advisors have the potential to be augmented by virtual and robo-advice tools, increasing individual advisor productivity, and ability to service more clients, or in more user-friendly and/or sophisticated ways.” Traditional firms need to realize that they have to be able to iterate quickly based on the market, instead of clinging to what has worked for them in the past.

You have a responsibility to further develop online and mobile capabilities, along with streamlining and optimizing your client onboarding and workflow. Robo Advisors aren’t just gaining traction because they’re digital, but because they have optimized their digital presence. When you’re considering your own steps, don’t look at the abstract, generalized idea: “They’re digital, so we should go digital!”. Instead, be highly specific about what’s working for your competitors by studying their methods and then strategically tackling them.

For many Robo Advisors, their fast and easy client onboarding process is one of the most appealing factors. An automated onboarding platform like Agreement Express can help firms compete with Robo Advisors’ ability to sign up their clients in minutes, giving traditional firms a digital boost that narrows the competitive gap. This is frequently becoming an essential step for firms, rather than one option among many. Nasdaq reports on a study Fidelity released earlier this year, that “financial advisors who use technology have 40% more assets under management than those who don’t, with 55% more clients.”

For the foreseeable future, investors will prefer a human connection with their advisors, but they’ll also go to whichever advisor has the best and most convenient technology to improve the investment process. It’s up to you to take the reins and point your firm in the right direction, while taking stock of the digital options in front of you. The future belongs to the firms who not only go digital, but can iterate and respond to the market rapidly.