Digital Advice Is Coming, and You Should Be Worried

A few weeks ago, I read an article written by a friend of mine that included this little nugget: “ I have tried to identify why automated advisors are perceived as a threat to RIAs despite the fact that they don’t seem to be very threatening. ” I stopped and re-read that statement a couple of times, as it seemed to reflect a common myopia that exists with many of today’s Registered Investment Advisors.

A bit of history is useful. Back in 2000, a young executive named Reed Hastings traveled to Dallas, Texas to try and sell a 49% stake of his money-losing venture to one of his established competitors. At the time, his company, Netflix, had a measly 300,000 subscribers and was bleeding cash, while his main competitor—Blockbuster Video—held a virtual monopoly on the video rental market with over 7,700 retail locations servicing millions upon millions of customers.

We all know how this story ends. Today, Netflix represents over 50 million customers globally and has become a Wall Street darling, while Blockbuster—which ended up passing on Hastings’ offer—filed for bankruptcy in 2010.

Of course, nobody is going to argue that managing an investor’s financial well-being is the same thing as renting a movie, but there is still an important lesson to learn from this: the impact that technology will eventually have on our industry is probably as non-obvious to us today as digital media was to Blockbuster’s Summer Redstone back in 2000. But it will most certainly have a profound impact on our industry, and advisors who aren’t thinking about their digital strategy today are setting themselves up for failure tomorrow.

For most of us, a company’s digital presence is becoming increasingly important in how we assign value to their products services. We’ve all grown accustomed to the modern conveniences that technology provides, such as the ability to make almost any purchase with the single click of a mouse. Our clients operate in the same environment, yet our industry has fallen seriously behind in providing them with a parity digital experience.

Consider the status quo: today’s RIA client has to navigate a fractured environment that spans advisor portals, custodial web sites, online reporting systems, and document vaults. None of these systems really talk to one another, making even the most modern offerings from the industry’s current darlings like Black Diamond or Tamarac woefully one-dimensional.

Contrast this with clients of digital advisors. They go to a single place to construct a financial plan, invest their assets in model portfolios, track performance, and occasionally rebalance to account for a change in goals or portfolio drift. Their experience is clean, modern, and—most importantly—unified. It’s at parity with everything else that they do online, and arguably superior to any digital experience offered by traditional RIA shops.

Now, at the risk of being pilloried for oversimplifying our business, I’ll point out that most RIA practices follow a fairly similar model: you discover a client’s financial goals and tolerance for risk, construct a financial plan, build some model portfolios, periodically rebalance, report on performance, and collect your paycheck. There’s obviously more complexity than that—many wealthier clients have more sophisticated needs, for example—but the basics are generally the same.

Most advisors are already using software tools to efficiently manage the bulk of these operational tasks. Financial plans are constructed with MoneyGuidePro, portfolios are rebalanced using Tamarac, and performance reports are prepared and presented using system such as Orion. In fact, most of the RIA advice offering has already been off-loaded to technology, meaning the only thing standing between advisors and client disintermediation is the quality of their advice and the strength of their client relationships. And that’s the problem.

Increased investment in technology will virtually guarantee that the sophistication and performance of digital advice will eventually match that of traditional advisory, at lower costs. And more than one industry has fallen victim to the disruptive effect that technology has vs. client relationships—just ask your local bookseller.

This disruption will be felt primarily with the types of clients that will fuel your future growth. These clients—mainly younger investors or the high-end of the mass affluent—are already comfortable with the idea of digital advice, and attracting them has become a focus of our industry.

Except they want more than to be your friend on Facebook. They want access to the kind of slick financial planning, cash management, and investment reporting tools that can be found for free from providers like, or for a low cost via digital advisors like Personal Capital, Betterment, or Wealthfront. Unfortunately, many of these same clients rarely meet your minimums, meaning that servicing them is a very expensive proposition.

This is where your custodian should be helping you. Many of the largest custodians already have the resources, ability, and—in at least three cases—the self-interest to build platforms that can provide digital advice to their retail clientele. Leveraging these platforms for your own business development—through some kind of white-labeling mechanism—will become incredibly important as you push yourself down the demographic chain to sustain your business into the next generation of wealth.

Of the large custodians, only Fidelity seems interested in providing their advisors with an immediate solution for providing digital advice, having recently announced a partnership with New York-based Betterment to make that digital advice platform available to RIAs. And while TD Ameritrade hasn’t made any specific announcements relative to digital advice, they should be commended for continuing to reduce the technology balkanization that exists in our industry by exposing more and more functionality of their custodial platform via a rich, open API.

Ultimately, digital advice represents far more than a selection algorithm. It’s a totality of modern experiences that provides clients with the same technology-enabled conveniences that they are used to having in every other facet of their lives. The richness of these experiences represent the future table takes for our industry. Get in front of this trend, or the cognitive dissonance created by what’s available to your clients online for cheap vs. what’s available from you for a pricier fee might eventually be too wide. And that’s the valley where dinosaurs live.

Don’t be the next Blockbuster.