Robo-advisory programs currently have $16 billion in assets but that’s expected to skyrocket to $489 billion by 2019, according to November 2015 Cerulli Associates report.
Should advisors ignore the Robo-Advisor like they did with the no-help/no-load companies or should they take a stance, be proactive and find more ways to retain the clients and assets they’ve worked so diligently for? Or, do they find a way to partner with the Robo-advisors and charge an advisory fee like they have with ETFs and no-load funds? The advisor has many options but they should have a clear understanding of the Robo-advisor programs, because it appears that this could be another tool to help their clients and themselves.
What is this Robo-Advisor fuss all about?
Who is their target market? What are the fees? What are their strengths and drawbacks? How many companies are involved in Robo-advising? What should advisors learn so they can speak intelligently to their clients about it?
Younger investors from Gens X and Y, as studies have shown, prefer to stalk information online rather than meet people face to face. Most of them definitely do not trust the big banks and financial firms on Wall Street. That makes this demographic, and all the wealth it is set to earn and inherit, a natural target for this kind of online service. Adam Nash, the CEO of Wealthfront, a major player in the online advisory world, was quoted in Financial Advisor (FA) magazine in 2014. “We’ve discovered over the last few years that this solution is immensely popular with young people,” he says. “Over 50% of our clients are under 35 and 85% are under 50. This is a generation that has grown up with computers. They know what software is good for and what it’s not good for.” For financial advisors that want to help their clients’ children and grandchildren, Robo-advisory programs could be a big help. It’s a win-win for young adults with smaller accounts and advisors that want to manage assets for the entire family, but not get burdened with excessive hand-holding with smaller accounts under $250,000. The Robo-advisor programs are a fraction of the management fees that most advisors charge their larger clients. You’ll see more about those reduced fees later in this article.
This is the biggest thing that’s happening in this world!
Some financial pros claim that this is the biggest thing that’s happening in the financial world. There is an onslaught of online investment management sites into the advisory space. Could this be the evolution of the financial services industry? Will a vast majority of advisors be doing this five to ten years from now? “The one thing I can say is constant in our industry is change,” states Neil Wood, President of Neil Wood Consulting and Best Selling author of The Best Practices of Successful Financial Advisors. “The Robo-advisor programs may not be for people with more complex financial situations, but for those non-affluent millenials, the Robo-advisor programs are very inexpensive and are gaining rapid momentum. Just look at the minimum account size for three of the major players in the Robo programs. Betterment’s minimum account size is zero, yes ZERO. Wealthfront’s minimum account size is only $500 dollars. Both of these companies are excellent, offer highly sophisticated investment models and lead the industry in fund flows in the Robo-advisory world. The management fees for AUM ranges from .15 to .25% in many of these Robo-advisory programs. Vanguard’s minimum account size on the other hand has a minimum of $100,000. Considering the excellent investment models you get with these companies at a fraction of the typical 1% fee, it makes these Robo-advisor programs very attractive.
Are the Gen X and Millennials the Forgotten Middle?
Some industry experts refer to this group as the forgotten middle among the investing public. It is estimated that there are $32 trillion in investable assets in this country and 33% to 40% of that is in this forgotten middle. This is a huge opportunity for advisors and especially younger advisors as more of the senior advisors are retiring. “One of the best strategic moves a senior advisor can make is to add several young advisors to their team. They can relate to people their age and that opens the door to the Millennials” says Neil Wood, a 30-year veteran in the financial services industry.
The financial services industry is as competitive as ever and the quest for new clients and more assets is an ongoing threat from the competition of many advisors in the industry. But for the proactive advisors, there are many ways for advisors to strengthen the relationship with their current book of business that makes it nearly impossible for anyone or anything to steal their clients. But it will take extra effort, a crystal clear message that explains the value that the advisor brings to the relationship, a laser-beam focus and more than just an attitude of gratitude, although that certainly goes a long way.
The One Constant In Our Industry is Change
Many clients want more from their advisors. They want to be certain that their relationship is strong and that the advisor knows what their greatest fears are instead of having a simple transaction relationship. They are also fee conscious. Does the advisor give them confidence that this is THE advisor that will take care of their families, living and health expenses and leave a legacy? Building a legacy of trust is key to successful relationships and asset retention. Trust can be built and strengthened with a series of questions, then listening intently for the answers and other meaningful concerns. That’s where consultative selling is a plus. If done well, the families will trust that they are in good hands for their future plans. But to accomplish this, the advisor will need to go above and beyond what most mediocre advisors do. The advisors that change with the times, sharpen their focus and welcome this group of investors, will open their practice to the trillions of dollars that will be transferred from one generation to the next within the next twenty years. This is another reason to add younger advisors to an aging practice. This younger generation is tech savvy and IF they decide to work with an advisor, they expect the same level of tech expertise.
The aging advisor should consider partnering with millennials that can “talk the talk and walk the walk” with these younger generations. Unfortunately, 58% of advisors today still believe their business will look the same in 2025. Remember the stock jockeys of the 1970s-1990s that refused to embrace financial planning? Many call them dinosaurs that died with a change in the way our industry did business. There will always be new competitors in our industry. People want faster, cheaper, better, improved, more powerful and a so-called better mousetrap. Have faith and patience working with these younger generations. According to a survey by Financial Planning magazine, most Gen X and Millennials admitted that if they inherited more than $250,000, they would hire a professional to manage and grow their money. Prepare yourself for the tidal wave and you can do quite well. But if you don’t prepare for it, the outcome may be drastically different.
Innovation via Vince Lombardi
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