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Robo-Fueled Segmentation Shows Wealth Management’s Future

By Thomas Coyle June 19, 2018

Three years ago, retail RIA Tri-Star Group set out to solve a longstanding problem. Its principals wanted to make smaller-account relationships, often entered into at the behest of important clients, less of a drag on operations.

“It’s not a large part of our asset base,” says Jonathan Swanburg of Houston-based Tri-Star, which manages about $180 million. “But it’s a strong and important part, especially because they’re mostly in accumulation mode as our other clients are in or approaching drawdown” as retirees.

Tri-Star isn’t alone in looking to robos to help them secure the loyalty of clients who don’t need — or even want — a traditional array of high-touch services and engagement. But in adapting consumer-oriented robo platforms to their immediate purposes, they’re learning to engage with clients as many will prefer long after they’ve graduated to premier-client status.

Though representing important relationships to the firm now and for its future, adding accounts under $250,000 — and in practice, frequently well under that, notes Swanburg — used to be onerous for Tri-Star.

“Having them on our traditional platform” — of which Schwab is custodian — “used to be like putting a round peg in a square hole,” says Swanburg, who describes his firm’s mainstream clients as “the working affluent.” And because the fit with Tri-Star wasn’t always right for these smaller clients, word-of-mouth suffered.

“It wasn’t always good marketing for us,” is Swanburg’s dry assessment.

So in 2015, with talk of “robo” investment advice and financial planning all the rage, Tri-Star turned to Betterment, a consumer-oriented, internet-enabled and algorithm-fueled robo startup that had just launched an institutional platform called Betterment for Advisors.

“Amazon Prime has changed everything.”
Greg Vigrass
Folio Institutional

“Three years ago it was the first game in town,” says Swanburg, explaining why Tri-Star chose New York-based Betterment over de novo rivals like Wealthfront and Personal Capital, or soon-to-come competition from big-name firms like Schwab and Fidelity Investments. As far as he and his colleagues knew, “there wasn’t another institutional robo available.”

In fact, when Schwab — a custodian Tri-Star loves working with on its bread-and-butter relationships — subsequently launched its own B2B robo, Swanburg says his firm decided to stick with Betterment.

“We looked at Schwab Intelligent Portfolios,” says Swanburg, naming the discount broker’s robo. “We think Betterment gives a better user experience. In fact,” adds Swanburg, “we regularly check in with clients and we haven’t had to think about switching” out of Betterment.

Brad Felix is another wealth firm executive who likes Betterment.

“As far as platforms in the robo space go, it’s among the best,” says Felix, technology specialist and sometime advisor at Cincinnati-based Truepoint Wealth Counsel — which he joined two years ago after it bought his startup RIA RhineVest Advisors, a Betterment-powered firm aimed at well-to-do millennials. “It’s easy for clients to use,” he adds. “In that regard it’s a huge plus that it was originally designed for consumers.”

But ease-of-use for clients isn’t everything, says Felix, whose employer manages almost $3 billion. Beyond consumer engagement the big things an RIA shopping for a robo wants is “automated trading, quick onboarding” and the ability to “make beneficiary changes and move money in and out of accounts.”

Other benefits of incorporating robo technology as an advisor-directed offering for smaller accounts include covering bases it usually takes several vendors to cover for bigger and more complex clients.

A custodian in its own right, a good robo will replace custodians like Schwab, Fidelity, TD Ameritrade and Pershing — and can eliminate the need for accounting engines like Tamarac and Orion Advisor Services while providing financial planning tools that, though “not as robust as eMoney Advisor or MoneyGuidePro,” still do the trick for smaller accounts, according to Felix.

Another point of attraction for Truepoint to Betterment is its independence. “We’ve seen a lot get acquired,” Felix says of robos such as Financial Engines and FutureAdvisor that have been swallowed up by strategic investors. In contrast, Betterment has kept its autonomy while “being able to raise capital again and again, he adds — and while its institutional wing signs deals with marquee outfits like Goldman Sachs.

Though Betterment won’t say how much of the $14 billion it manages is institutional money, Betterment for Advisors head Cara Reisman is happy to assert its success to date comes from its ability to help firms execute client segmentation strategies and streamline their back offices.

“Advisors are interested in doing what they’re really good at – which is working with clients. And our technology makes that easier for them,” says Reisman. “Ultimately, we help them save time and money.”

Meanwhile Greg Vigrass, president of Folio Institutional, is eager to remind advisors Betterment isn’t the only — or even the first — independent, consumer-oriented robo to carve out a niche as an institutional helpmeet. He says 12-year-old Folio Institutional and its 19-year-old parent, McLean, Va.-based fractional-share brokerage FOLIOfn, were robos before the term was coined.

Brad Felix

“To us, the robo story is one of digital engagement and a black-box algorithm,” says Vigrass. “There is nothing new there.” What has indeed changed in recent years, says Vigrass, are “the rules of engagement.”

We live in a world, says Vigrass, where consumer expectations are being set not, as once was the case, by giants of each retail segment — be it grocery shopping, book buying or investing — but in brutally broad strokes by the likes of Amazon, Google and Apple.

“Amazon Prime has changed everything,” says Vigrass. As a result, “customers are more than willing and able to engage digitally,” says Vigrass. To such an extent “financial-service firms” are now constrained to engage consumers on consumers’ terms, not — perhaps for the first time ever — as firms see fit.

“You can now leverage technology to give people” — including advisors — “the tools to do their best thinking,” says Vigrass. As a result, client portfolios can be more responsive and nuanced with outcomes more likely to reflect the collaborative planning that informed their construction.

Though the future of financial advice is anything but “entirely digital,” Vigrass says clients of the future will expect “to be able to pick and choose” when and how they want to balance digital and human interaction.