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Why Robos Aren’t the Cause of Fee Compression

July 31, 2018

A lot has been said about robo-advisors driving fee compression in the financial advice space. But the reality is digital advice platforms can be an opportunity for advisors to prevent fee compression, Sara Grillo argues on Advisor Perspectives.

Robo-advisors were indeed a disrupting force in traditional financial advice, she writes. Betterment offered a direct-to-consumer financial advice model, followed by others in the fintech industry — although most of them have been bought out by traditional financial industry players, according to Grillo. And firms like Schwab and TD Ameritrade rolled out their own versions of robo-advice platforms, she writes.

Nonetheless, the robo-advice industry is still nascent, Grillo insists. They haven’t been tested in a major recession and when one comes around, many investors will value a human advisor to guide them through the downturn, she writes. Many robo-advisors won’t be around after, according to Grillo.

But in the meantime, what consumers value in financial advice is no longer the same as it was before robo-advisors came about, she writes. They’re no longer impressed with lackluster performance from portfolios based on funds put out by large financial institutions and rebalanced once a quarter, for example, according to Grillo.

At the same time, financial advisors can’t offer services to the children of their wealthy clients in the hopes of getting worthwhile business 15 years down the line, she writes. Ultra high net worth clients, meanwhile, expect truly comprehensive estate, tax and liability planning to justify spending 1% on fees or more, warns Grillo. All of these factors suggest there will soon be two kinds of advisors — both of which can benefit from the robos, she writes.

On the one hand, what Grillo calls the “digital advisor” can serve the mass affluent in the hopes that one day they will become their high net worth clients.

Digital advisors can offer services for an initial charge and a flat monthly fee, providing their clients with podcasts or webinars and newsletters, 30-minute annual reviews, financial plans for an additional fee as well as extra consultation time on the phone or via email for an extra fee, she writes.

Robos can help such advisors automate much of the financial management process, including tax loss harvesting, according to Grillo.

The second type of financial advisor will be the private banker who can charge the 1% fee for truly exceptional performance and sophisticated tax and estate planning, she writes.

This group of advisors can also benefit from the automation offered by robos, according to Grillo.

Everyone in between, meanwhile, will be squeezed out, she writes.

By Alex Padalka
  • To read the Advisor Perspectives article cited in this story, click here.