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Who’s Under Threat From Robo Advisors?

By Thomas Coyle February 27, 2017

So-called robo advisors are starting to compete head-on with traditional advisors.

It’s not just that robos — automated, algorithm-based portfolio management services — pose a conceptual threat to the status quo. Nor is it just that they’re making brick-and-mortar advisors adopt nimbler and more interactive technologies to compete in terms of ease of use and general accessibility.

They’re having those influences, certainly. But now, say FAs and industry experts alike, prospects and existing clients have started to balk at traditional fees explicitly because of what they’ve gleaned about lower-cost robos.

In a new Guidance Update, the SEC says robos “represent a fast-growing trend within the investment advisory industry” and could “change the competitive landscape in the market for investment advice.”

And sure enough, in some cases flesh-and-blood advisors seem to be losing out in direct match-ups with their automated counterparts.

Advisor Rick Kahler suspects that nearly happened to him last year.

Amid what he flags as a slight slowdown in conversion rates in 2016, Kahler says one new client said it had come down — and as a near thing — to a robo and his firm, Kahler Financial Group in Rapid City, S.D., which manages about $200 million.

Kahler says it’s significant the client in question was a “younger accumulator” — someone whose financial needs hovered between basic and slightly more complicated.

Still, that the client had overtly pitted him against a robo suggests to Kahler that automated advice platforms — whether from private-equity-backed standalones like Betterment and WealthFront or ensconced in institutions like Vanguard, Schwab or Merrill Lynch — are a now a real factor in the competitive equation.

John Napolitano of U.S. Wealth Management in Braintree, Mass., also says he’s hearing more about robos from prospects and clients these days, and it’s a discussion he welcomes.

By stripping fees down to the minimum required for asset management — 25 basis points to 40 basis points, says Napolitano — robos have put the onus on wealth managers to explain why they charge more.

“They bring attention to cost of asset management and the value of other services we provide” — and in so doing justify the higher cost of U.S. Wealth Management’s holistic approach, says Napolitano.

John Napolitano

“For me robos are fantastic at getting a conversation started: ‘Sure, we cost 100 basis points but here’s all we can do,’” Napolitano says in reference to his firm’s service roster, which includes financial planning, insurance, tax and estate planning and family governance in addition to investment due diligence, advice and implementation.

Robos are a problem for advisors who charge 1% and “don’t do a damn thing” beyond what their automated counterparts can do for much less, adds Napolitano, who manages about $370 million with another $230 or so in his clients’ brokerage accounts. “Savvy advisors, real wealth managers, who put in 40, 50, 60 hours a year on a client will feel no pressure.”

Kendra Thompson, a managing director in Accenture’s wealth and capital-markets unit, agrees there has been a definite “increase in advisors saying clients are talking about robos and,” as a result, “questioning the value” of traditional FAs.

But as robos — aided perhaps by aspects of artificial intelligence and more acute interactivity — evolve toward more comprehensive offerings, how much advisors have to fear from them could soon be as much a matter of an advisor’s age as the breadth of his or her service menu, says Thompson.

This means “advisors under 50 need to be creating a thoughtful response” to robos, she adds.

In practice, this is likely to take the form of hybrid human-robo approaches as a new normal — with those who fail to adapt, even if they lay claim to high-touch and far-reaching client services, tipping into oblivion.

In this light, says Thompson, whether robos are seen as unwelcome pressure or a goad to new front-office efficiencies, “the next generation of advisors won’t look anything like today’s advisors.”