Abnormal Returns is on a bit of a respite this week. That does not mean that we are content-free. As we have done in previous years we asked a panel of highly respected independent finance bloggers a series of (hopefully) provocative questions. Below you can see the blogger’s name, blog name and Twitter/StockTwits handle. We hope you enjoy these posts as much as we do. Feel free to jump in the comments with your own answers to the questions.

Question: Venture capital has likely dried up for stand-alone robo-advisors. If so, where does the business of rob-advising go? Or said another way is robo-advising simply going to be the way advisors manage client accounts going forward? (Answers in no particular order.)

Jeff Miller, A Dash of Insight, @dashofinsight:

I have difficulty getting away from a model including a high level of individual service.  That said, younger investors who are just building their assets deserve help.  I certainly do not see this as the primary way to manage client accounts.

Michael Kitces, Nerd’s Eye View, @MichaelKitces:

Venture capital has likely dried up for stand-alone robo-advisors. If so, where does the business of rob-advising go? Or said another way is robo-advising simply going to be the way advisors manage client accounts going forward?
Ultimately, the robo-advisor technology “disruption” trend is playing out in a remarkably similar manner to the great technology “disruptions” of the past, which also never actually disrupted advisors. In the 1970s and 1980s it was the rise of technology scaling discount brokerage that was going to put stockbrokers out of business. Instead, they simply moved on to sell mutual funds instead. Then in the late 1990s the online trading platforms that provided consumers direct access to mutual funds were going to put financial advisors out of business. Instead, they simply moved on to help with holistic asset-allocated portfolios instead. Now once again, technology is predicted to put financial advisors out of business, and instead it’s simply commoditizing the asset allocation component of the portfolio, and advisors are moving on to financial planning and wealth management.

Notably, at each of these technology inflection points, there is an “old” way of doing business that is left behind, and a new one that is born. At each transition, the financial advisors who emerge from the other end are forced to step up the value they provide to clients, which knocks the lowest quality advisors out of the industry altogether, and allows the best advisors to build even bigger, better businesses than ever seen before.

And so once again, the robo-advisor trend appears to be playing out in the exact same manner. Ultimately, the technology is a benefit for both consumers and advisors, whether it’s lower stock trading costs from discount brokerage, the capabilities of websites to facilitate trading and portfolio management, or software to helps to manage model portfolios and automate their implementation and rebalancing (a la “robo”). But technology doesn’t kill advisors, it augments them instead. And makes the best advisors bigger, better, strong, and delivering more value to consumers than ever before.

That being said, I think we’re only just know realizing that it’s the secondary ways that the industry leverages “robo” technology that will be truly disruptive, not to financial advisors, but other components of the financial services ecosystem. From “Indexing 2.0” threatening today’s ETFs and mutual funds, to better robo platforms replacing today’s advisor custodian platforms, the impact of better technology – and the competitive forces it unleashes – will still be felt for many years to come!

Robert Seawright, Above the Market,@rpseawright:

I suspect the robo-advising will have multiple iterations. Some will be stand-alone (but it’s difficult to see how they will make money going forward). Some will be under advisor control as a way to reach lower-tier clients. These will be designed to try to break-even but merely to provide ancillary service. And some will be a framework from which advisors will do business with a full digital platform for financial planning, conferencing and the like.

Michael Batnick, The Irrelevant Investor, @michaelbatnick:

There is room for robo-advisors and personal advisors. I think there will likely be some consolidation in that space with just a few giants ultimately remaining. Robo-advisors will never fully replace their physical counterparts because advice is personal and an automated solution isn’t what the majority of high net worth clients want. I think actual financial advisors will increasingly adopt and offer their own automated solutions.

Mebane Faber, MebFaber.com, @mebfaber:

First, we have always said that they business of robo-advisors will be dominated by the custodians like Vanguard and Schwab, and that has turned out to be the case. They have a built in cost advantage in that they manage their own funds.  So, they can either offer a portfolio for free (Schwab), or financial planning for a low cost (Vanguard, 0.3%).  This doesn’t mean that there isn’t room for 10, or even 20 successful hybrid or robo-advisors, it just means that they need to scale for the business massively to be profitable at a low fee level, or, they need to keep headcount low and have a low cost of client acquisition, or be high fee and offer a lot of value to someone.  The 20th biggest ETF manager still manages over $3 billion in assets so we think there is plenty of room for numerous players. Most investment managers and advisors will roll out a digital RIA offering of some form in the next three years.

Ben Carlson, A Wealth of Common Sense, @awealthofcs:

The competition for robo-advisors will continue to heat up because almost every wealth management or fund firm is going to have their own version of robo-advisor software at some point. I think the best way for robo-advisors to continue their growth will be to make a huge push into the workplace retirement business (something Betterment is already doing). The 401(k) and 403(b) markets are ripe for disruption by a low-cost provider as most of these plans are filled with terrible fund choices and high costs to plan users. Plus, the 401(k) market is much stickier in terms of clients because you have money automatically going into client accounts out of every pay check. Most companies don’t have the expertise to understand these plans on their own so offering a simple, low-cost solution would seem like an obvious way for robo-advisors to gain market share. This is especially true among small businesses who are the most over-charged group in need of a better solution.

Jeff Carter, Points and Figures, @pointsnfigures:

VC money might have dried up for Robo-Advisors, but Robo-Advising is probably not the near term future either.  Some combination of people/robot will win out in the end.  Because it’s actual money, it’s a lot different than ordering through an app.

James Osborne, Bason Asset, @BasonAsset:

Robo technology will be a commodity in 3-5 years maximum. Every custodian will offer it, with the ability to customize portfolios, to RIAs to use for their clients. If the tech can catch up with major rebalancing software to include mutual funds, handle inherited/legacy appreciated stock positions and be smart enough to allocate across a full range of accounts in a portfolio, it will gain widespread adoption, and we won’t even be talking about it anymore.

David Fabian, FMD Capital, @fabiancapital:

In my opinion, the business of robo-advising is most likely going to end up at the larger online brokerage companies. Schwab is a perfect example of a company that is integrating this well in tandem with their platform of low-cost ETFs. Fidelity, Vanguard, TD Ameritrade, and others will likely follow suit to keep up with this trend.

Jake, EconomPic Data, @econompic:

Like much of fintech, I view robo-advice as a feature rather than a solution. So, while I remain thrilled that robo-advisors exist to put pressure on traditional advisor fees (much the way ETFs have pressured mutual funds fees), I really don’t understand where the ‘actual’ service they provide sits on the advice through allocation spectrum that consists of a traditional advisor that acts as fiduciary on one side (higher fee, higher interaction, higher education benefits to their clients) and the multi-asset / target date ETFs on the other (lower fee, lower interaction, lower education).

Over the years I’ve realized that 90%+ of the value a traditional advisor provides is the “advice”. Advice does not only consist of the beginning “how much risk are you comfortable with” phase or the year-to-year “has anything changed” phase, but a real thorough understanding of changes that have taken place in their client’s life. As important is the “advisor as therapist”, talking their clients down from the ledge when investment behaviors ebb and flow with the market.

Taken together, robo-advice as “another tool in an advisor’s toolbox” seems the most likely path forward rather than as a stand-alone business.

Ivaylo Ivanov, Market Wisdom, @ivanhoff:

Robo-advising is here to stay and it is a good solution for many young people that don’t have the time or desire to learn now to actively invest. With that in mind, it robo-advising is not the way of the future and it probably has a limited growth potential. It simply cannot replace the hand-holding, education and personal touch and great human advisors deliver. There’s market for both.

Charles Sizemore, Sizemore Insights, @clsizemore:

Venture capital has likely dried up for stand-alone robo-advisors. If so, where does the business of rob-advising go? Or said another way is robo-advising simply going to be the way advisors manage client accounts going forward?

I really see the robos getting atomized into smaller and smaller operations. We’re nearly to the point where every advisor can offer their own robo. In fact, I’ve been working with Wes Gray and his team at Alpha Architect to do exactly that.

This is a big deal because the biggest impediment to an advisor growing their practice is time. Your instinct is to try and serve every client that knocks on your door. But the reality is, you can’t. Your time is simply too valuable to do a lot of sit-down meetings with clients that have only modest sums to invest. Time has a monetary value, and you actually lose money on smaller clients. You have the same amount of regulatory compliance headache with a $10,000 client as a $10,000,000 client. Arguably, you actually have more.

But a robo setup changes that. With a robo setup, you can still profitably serve smaller clients, get them the same portfolios you would give a high roller, and all the while keep the regulators happy. A robo setup also allows a larger client to “kick the tires” and try out your services before committing a larger portion of their net worth to your management.

Wayne Lloyd, Dynamic Hedge, @dynamichedge:

I view the first wave of Robo-advisors as a UI layer built on top of a commoditized business (Jack Bogle/Vanguard already commoditized passive investing with 0.05% expense ratio for the S&P 500). The same way that Dropbox developed UI and innovations onto the commoditized PC filesystem, robo-advisors have added UI and features to commoditized passive investing. While these improvements do make the process of getting started easier for the average user, is a software layer enough to make acquiring customers cheaper and demonstrate value longer than the traditional model? We need at least a full investment cycle to know for sure. Overall, the entire industry will get better at making software central to the investment process because the public will demand it. There’s no question about this, so in a way, everyone becomes a robo-advisor. The industry adopting software best practices and a bear cycle will be a major stress-test for the stand alone robo-advisors. Anyone who survives this cycle is here for good.

Conor Sen, Conor Sen, @conorsen:

Robo-advising, like much of fin-tech, is a feature/product, not a company.

Josh Brown, The Reformed Broker, @reformedbroker:

Robo-advice is a misnomer. It is actually robo-allocating. There isn’t any advice being given because advice is personal. Automated allocation is not a bad thing, however. I think Wealthfront will be the biggest standalone B2C robo and Betterment will find a lot of success in its advisor B2B product and possibly find success in 401(k). Schwab and Vanguard will own the category but its not new money for them, just assets being swept out of less efficient channels within their firms and into the software solution. It’s much more of an evolution for the industry than a revolution and the press got way too carried away at the outset (what else is new?).

Robin Powell, The Evidence-Based Investor, @RobinJPowell:

The robo space has certainly become quite crowded now and, yes, almost all advisory firms in future will have to incorporate some sort of robo element. As for stand-alone robo-advisors, any new entrants will need to offer something very different to what’s already out there. For me, there are two areas that still provide potential for disruption. First, I’d like to see a robo service that puts investor education and high-quality content right at the heart of its operation. Second, isn’t it time we saw a genuinely international player? Clearly there are regulatory, linguistic and cultural obstacles to overcome, but surely these aren’t insurmountable.

Cullen Roche, Pragmatic Capitalism, @cullenroche:

Robo “advisors” aren’t really advisors. They’re robo asset allocators. The robotic allocations are susceptible to flawed risk profiling and inefficient portfolio management for most people with a sophisticated financial plan.  The business of asset allocation is too personal and customized to ever become fully automated so the best solution is some integration between the human and robot sides.

David Merkel, Aleph Blog, @alephblog:

Robo-advising does some basic asset allocation tasks at low cost.  It won’t aid as much with tax issues, or be able to make hard decisions at a point like 1998-2000, where the market was screaming at you to leave.  The robos will be a permanent part of the advice ecosystem, like indexing, used by some clients and advisors alike.

Wesley R. Gray, Ph.D., Alpha Architect, @alphaarchitect:

It’s true there is probably limited VC capital for undifferentiated robo-advisors, who have run into an unfortunate truth: client acquisition is very expensive. Even so, the robo-advising revolution is just getting started, but it’s moving in a different direction. We’ve written a fairly extensive piece on why we built a robo-advisor and why we recommend that all advisors at least consider the concept.

In order to survive, RIAs are going to have to find a way to integrate robo technology in their practices. They can’t afford not to, since robo makes them more efficient and helps them handle more clients. Today’s robo technology is not just a generic bolt-on robo asset allocation solution. Robo allows RIAs to offer questionnaires to assign risk profiles and suggest allocations, electronic/paperless onboarding process, automated trading, aggregated account information and performance reporting, and even compliance. RIAs aren’t looking for a robo “specialist,” but a partner who can automate more of their practice, from the front, to the middle and back office.

Additionally, because the RIA solves the difficult – and costly – problem of client acquisition, and maintains the relationship, they should get to own the brand, not the technology provider. RIA’s don’t want to be shoe-horned into someone else’s asset allocation methodology and those who provide the technology are probably not the right people to be providing an asset management approach anyway.

Thus, the next generation of robo advisors will have to provide their service not as part of a co-branded partnership, but as a white-label, exclusively RIA-branded technology service customized to an RIA’s own investment style, not someone else’s. Using a robo technology platform, the RIA can then focus on adding value through smart asset allocation, product research and selection, maintaining client relationships, acting as a psychology coach, and by offering additional services, such as financial or estate planning.

Tom Brakke, the research puzzle, @researchpuzzler:

I think that advisors will feel the need to offer similar capabilities themselves to get at the “screens” generation.  The “investment management as a commodity” meme, kicked off by the robos, won’t be going away.  The writing is on the wall.  Therefore, advisors are going to have to figure out how to get away from the AUM fees that most still use.  The value that a good advisor adds has always been about everything other than investment management; now the pricing model is going to have to start reflecting that.


Thanks to everyone for their participation. Stay tuned for another question tomorrow.

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