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Next-Wave Robos Shake Things Up for FAs (Sept. 7)

By Murray Coleman December 30, 2016

One of the most popular tech stories of 2016 explored the new wave of robo-advisors and their impact on FAs.

The popularity of automated investment advice is leading to a new wave of robo technologies. But not everyone is convinced these next-generation robos represent a real advance in promoting sound portfolio-management strategies.

“Robo 2.0 is unleashing a whole new set of tools largely available to professional advisors for general consumption,” says Brent Brodeski, chief executive of Savant Capital in Rockford, Ill., which manages about $5 billion.

At the same time, he characterizes such new-age robos as “hedge-fund wannabes.” As a result, Brodeski sees such services as “absolutely no threat to traditional wealth managers.”

The new crop includes robos like Macroaxis, qplum, LifeStage Investing and Kavout. As a group, such next-generation managers are employing a range of technical analysis, hedging techniques and tactical trading strategies.

A big red flag, according to Brodeski, is that these second-gen portals can expose clients to a lot more complexity in the investment-management process. At the same time, he warns, many of these online services use more expensive funds and charge higher advisement fees.

Those differences can mark a significant change in course from first-gen robos offered by the likes of Betterment, Wealthfront, Schwab and Vanguard, he adds.

“This new wave of enhanced robo service is really stretching the parameters of basic asset allocation theory – it sounds like many of these are talking out of both sides of their mouth in terms of blurring the lines between long- and short-term investment planning,” says Brodeski.

First-gen robos are typically built around strategic investment strategies adhering to Modern Portfolio Theory, notes Andy Kapyrin, a partner at RegentAtlantic in Morristown, N.J., which manages about $3 billion.

That means such computer-guided systems tend to allocate across low-cost and diversified ETFs, focusing on inputs such as return patterns over time, asset class correlations and differing levels of market risks.

By contrast, the robo 2.0 wave is likely to appeal mostly to do-it-yourself investors who are more active traders, suggests Kapyrin.

“They’re offering a lot more granularity,” he says. “So the danger is that they’re focusing on the trees rather than the forest.”

Next-gen robos don’t interest him since his firm focuses on clients with a range of planning needs, not just portfolio management.

Brent Brodeski

“These new robos are offering investment services that probably appeal mostly to skilled hobbyists,” says Kapyrin. “We see it as a niche within a highly commoditized market for investment-only advice.”

Scott Bordelon, president of Beam Asset Management in Covington, La., agrees. He has just spent the past eight months researching robos, both traditional and newcomers.

His indie RIA, which manages about $380 million, last week launched its own “robo chassis” to reach aspiring professionals with as little as $5,000 to open accounts online.

The service, named LightBeam, is “second generation” since it uses both active and passive ETFs, according to Bordelon. Net fees for the new service range from around 0.50% to 1.25%, he says, depending on portfolio complexity.

His firm’s portfolio managers also tactically manage allocations, mainly by overweighting different asset classes based on their intermediate- and long-term market forecasts.

Still, Bordelon doesn’t expect LightBeam’s annual portfolio turnover rates to exceed more than about 30%. “We’re not taking a market-timing approach like a lot of these new robos are promoting,” he says.

Another hybrid feature that Bordelon’s service is offering to help set itself apart is to assign clients individual advisors to use at any given time. Such human intervention can be accessed via emails, video conferencing, phone calls or online chats.

Bordelon believes such a wrinkle will help investors working remotely better understand his firm’s investment process. He also hopes adding a human element will lead to broader wealth management discussions beyond basic portfolio questions.

It’s also sending a clear signal to clients, adds Bordelon, that his new service embraces a regulatory push for higher fiduciary standards – something he worries might become more obscure to clients signing up for trend-following robos offering a broader menu of active investment strategies.

“Although we’re using many of the same tools as these second-generation robos,” says Bordelon, “we remain skeptical about how successful these new online services will prove to be over time.”

See the original article, published September 7, here.