Doom and gloom should be surrounding the financial services industry as robo-advisors disintermediate assets from traditional financial advisors into their own coffers.  Will this trend ultimately lead to a shriveling of the need for human advice? Is this the future of the financial services industry? 

 

It depends.  It depends on multiple factors including the following:

• How does one define the role of the “traditional” advisor?
• How many existing advisors actually want to change their current model?
• Can “robo-advisors” become a part of the existing service model?

 

Advisors who want to ensure that their business lasts for more than the next decade may want to reassess how they are currently doing business and begin to adapt to an industry in which technology performs many of the activities they have “traditionally” provided.  Yet many advisors may already be on the right track to providing the services desired in the future.

In Spectrem’s ongoing research with High Net Worth Investors, we have found that they use different types of financial advisors.  For example, 34 percent of Millionaires use a Full Service Broker while 17 percent use an Independent Financial Planner.   Another 10 percent use an Investment Manager and 7 percent use a RIA.  Overall, 76 percent of Millionaires use some type of financial advisor.

 

So which of the above advisor types are “traditional advisors”?  Trying to define what services a financial advisor provides can be incredibly confusing.  Let’s just say that for purposes of our discussion today, a “traditional advisor” is focused on providing advice on investments only.  This may include an advisor that sells a “managed program” to an investor or even an advisor that may give specific advice about individual stock picks.  Why do I define these individuals as “traditional advisors”?  Because twenty years ago, very few investors traded stock online.  Even fewer investors followed the stock market.  CNBC (founded in 1989) was still a newbie and primarily watched just by financial advisors.  Overall, the only way consumers could really access the stock market was primarily through a financial advisor that was focused on trading securities.   And let’s face it; most of the people that had enough assets to invest in the stock market at that time are probably over the age of 50 today. 

 

Prior to the economic downturn in 2008, many full service brokers would have easily fit into the definition of a “traditional advisor”.  Since that time, however, the large wirehouses and regional brokerage firms have made an effort to expand the role of the advisor.  This may include additional services such as financial planning, estate planning and even advice on business succession.  I would argue that full service brokers who provide these types of services in addition to their investment services no longer fit the “traditional advisor” definition.  Most financial planners have never fit into the “traditional advisor” definition.  Their services have always been more holistic.  In fact, many only recently have expanded into actual investment advice.  As far as investment managers and RIAs are concerned, it depends upon the services they are actually providing.  Is it a holistic financial advice model?  I would also counter that in-depth investment expertise in a particular investment type …..such as bonds or alternatives or any other specified security….may take one out of the definition of “traditional advisor” and into the role of a specialist.

 

Why are these distinctions important?  Because, as many of you know, the actual investment process has become somewhat of a commodity in the eyes of the investor.  For many, they believe that a computer program can do just as good of a job investing assets as a human advisor.  And while human advisors will dispute that fact and compare their outcomes to those of a computer-generated model, it doesn’t really matter if that is the perception of the end investor.  In fact,  when Millionaires were asked who would do a better job of picking out stocks to meet the investor’s individual risk tolerance, 57 percent said a human advisor but 16 percent said a Robo-advisor and 28 percent said a Robo-advisor and a human advisor would be the same.  Similar answers occurred when Millionaires were asked about adjusting a portfolio for life changes.  Twenty five percent of Millionaires said that Robo-advisors and human advisors would do the same job while 12 percent said that a Robo-advisor would do better.  Robo-advisors scored even more highly for retirement plan advice and insurance selection.

 

So does that mean that human advisors will eventually be overtaken by Robo-advisors?  Absolutely not…..unless the only value the advisor provides is searching for low cost insurance options or running a model for investment selection.  The role of the advisor is not to do the “traditional” job of trading stock or running models.  Prior to the rise of online brokerage accounts, the only way to invest in the stock market was through a financial advisor.  Today, anyone can do that.  The value of an advisor is being able to analyze multiple issues that may eventually confront a family and helping them to make financial decisions that will enhance their ability to make and save money. 

Recent research that Spectrem conducted with investors of multiple wealth levels actually showed that investors that chose to use a robo-advisor were not the self-directed types of individuals everyone assumes they might be.  In fact, they wanted advice but were afraid to approach a human advisor.  The fear was based on two primary concerns:  that the fees would be too high or that they didn’t have enough assets to warrant using an advisor.  And ultimately, they were less satisfied with their robo-solution than were those who used a human advisor.

 

How can advisors attract these individuals?  And how does an advisor change his or her existing model to meet the needs of future investors?  By incorporating the Robo-advisor model into their practice.  Younger investors or less wealthy investors may be attracted to a low cost Robo-advisor model at the outset of a relationship.  But once the amount of assets increase or when the investor confronts a real-life financial decision, it is likely that they will turn to the human advisor for advice.  Which assets should they liquidate to pay for their child’s college tuition?  Does it make sense to pay down their mortgage or to invest?  The practical application of financial decisions, including the tax concerns and long-term financial implications, will be the role of the advisor in the future.  If advisors are unable to provide this more holistic service, perhaps they should consider retirement or a different career.

 

Many advisors may not want to change how they are providing services to their customers.   They may have a lucrative practice that they have chosen to ride out until retirement.  But for those advisors who are looking to attract new clients, now is the time to include technology and new forms of communication into one’s practice to meet the needs of both younger and older investors.

 

More than three-quarters of investors, regardless of age, currently use a smartphone, according to Spectrem’s recent research.  Almost half would be comfortable speaking to an advisor via Skype or Facetime.  More than half are on Facebook.  Usage of other social media channels continues to increase.  Tomorrow’s advisor must become comfortable with these communication channels in order to appeal to the clients of the future.  In fact, almost a quarter of younger investors use social media more to gather information and communicate than the telephone or news media.

 

For an investor who has grown up using the internet and smartphones for all or most of their lives, it is easy to understand why they believe technology and the related computer generated models are more reliable than humans….especially considering the existing political and investment environment.  Remember…Gen Xers and the Millennials missed the early years of technology when things didn’t always work quite so smoothly!

 

To be successful in the future, financial advisors need to rely more on their technical expertise and life experience rather than relying upon running models that will determine how someone should invest.  Leave the models to the Robo-advisors.  But if an advisor has an in-depth knowledge regarding specific types of investments, or if the advisor can discuss how an investor can juggle paying for college, finding long-term care solutions for an aging parent and figuring out how an investor can still save for retirement despite all of the foregoing….then that advisor is truly providing “value-added” services above and beyond what a Robo-advisor will ever be able to do.