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The Robo-Adviser Threat Revisited

John Wise

Given the amount of attention paid to the noisy entrance of robo-advisers, one would think they would be dominant players by now. They have raised substantial funding, and opened millions of accounts. Average balances are small. Costs are high. Profitability is elusive.  So what’s to come?

Independent Financial Advisers (IFAs) have largely dismissed the threat. Robo-advisers have been a distraction versus a challenge because they have been too small. John Wise, co-founder, CEO and chairman of InvestCloud said: “This was because robo-advisers had been fighting and winning in the mass affluent market. IFAs aren’t focused here because they cannot profitably service them. These small accounts have simple allocation concerns – which can be easily satisfied by simple model portfolios, allocating into simple fund buckets of assets.

“Yet robo-advisers have helped traditional advisers by growing new investors that will then ‘graduate’ to a proper advice relationship. But that might change.”

Upward mobility

Wise said: “Robo-advisers are becoming more aggressive and sophisticated. Tools are smarter. They offer more holistic asset views that – by linking to external accounts – are increasingly reliable and comprehensive. They are providing better views of their assets and more bespoke ways for making investment decisions. Take Wealthfront’s recent decision to offer its Path planning tool for free. No investment balance required. Why is this important? Path raised the bar by moving into retirement planning. It offers the forward-looking income, cashflow and retirement views previously owned by professional advisers. Path makes Monte Carlo scenario analysis easy to do and available to all.

“There is another – perhaps greater – threat from the largest D2C custodians for advisers. Schwab and Fidelity have grown their hybrid offerings, which are proving successful because of greater brand loyalty compared to robo-advisers. Along with hybrid offerings from large banks and wirehouses, one is left with the conclusion that what was just an experiment a few years ago is now a successful, rooted service strategy.

The right response

Wise said: “What is the response? This is no longer a binary decision due to recent maturity in the fintech space. The only limits are creativity and how bespoke the digital offering must be, no matter the size of the firm.

“Having helped hundreds of wealth managers and IFAs integrate automated services and advice into their current service models, InvestCloud has a unique perspective. One being firms that succeed are those that offer a clearly defined services model. Digital cannot be an afterthought. Digital is not just about adding a low-cost way for millennials and Gen Xers to access services. The convenience of digital self-service options is something which all clients have shown preference. It must be in addition to personal advice, across generations and personal assets (Mass, HNW, VHNW,…).

“A successful digital and direct strategy gives traditional advisers a means to protect against the threat of asset loss when their primary client passes. Heirs often take the money to other advisers. Engaging them digitally can provide a path to retention. Low-cost automation provides a practical means for establishing family relationships while the parents are still alive. Beyond asset retention, it means deeper relationships with clients to engage holistically in their family context, rather than solely as individuals. Behavioural science deployed with digital provides community dynamics across families and friends. This provides retention and growth to an advisor.

“It may have been prudent to delay the response to the rise of robo-advisers until now. But continuing to do so presents serious competitive risks.’

The threats of pure robo-advisers getting smarter, along with increasing hybrid offerings from banks, custodians and wirehouses, now means that staying old school is no longer a viable strategy.

Wise said: “Robo-advice, or what InvestCloud calls Digital Advice, is available to any wealth manager from millions to billions. The sophistication of the digital dialogue is driven by digital and investment savviness, not age. All clients need to be digitally addressed to provide digital empathy – InvestCloud’s Program Writing Programs enable our clients to have endless personas for digital empathy. This builds the transparency and trust that will provide client retention and growth.”

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