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Is Your Advisor Riding the Money Train?

By March 31, 2016September 21st, 2022No Comments

Technology has transformed virtually every industry, forcing businesses to be more innovative, change their pricing models and deliver a better customer experience.

But the financial advisory business doesn’t seem to have gotten the memo. Advisors are now facing a spirited challenge from low-cost, online investing platforms known as “robo-advisors,” but most have kept their heads planted firmly in the sand. Why? Because the new technology threatens their cushy, client-unfriendly business model. For most, ignorance is bliss, particularly if an advisor’s success hinges on a client’s ignorance.

At AdvicePeriod, we suggest that you keep a close eye on how advisors react to consumer-friendly technology like robo-advisors; those with their head in the sand are in for a nasty surprise. Forward-looking advisors, on the other hand, we believe will harness technology to give clients a better experience, better service and more success in reaching their goals. And all parties will thrive as a result.

Robos, which automatically create and manage investment portfolios, already manage $18.7 billion, and are expected to reach $489 billion by 2020, according to Cerulli Associates, Inc1. Each of the major Wall Street firms have announced some form of robo integration; albeit primarily for smaller accounts that they don’t want to service. We’re proud to count ourselves among the forward-looking advisors who have begun to integrate this technology into their businesses. The AdvicePeriod team has embraced evolution since our inception.

The technology we employ today automates tasks ranging from asset allocation and security selection to minimization of tax liabilities through active tax-loss harvesting. The truth is that robos can do these things as well – or often better – than humans and typically at lower cost. Advisors who integrate this technology into their business can free up time to focus on areas including tax advice and estate planning that can be even more impactful to clients than their investment results.

So, what’s the big deal and why robo-advisors are such a threat to backward-functioning advisors? Most traditional advisors charge their clients by lumping together a mix of services, like financial planning, investing and tax management. They charge either sales commissions, a set fee based on a percentage of assets under management, or a confusing mix of both. Since advisors usually do not itemize the cost of each service, clients are often left in the dark about the services they’re receiving and what they are being charged for those services.

Advisors’ use of obfuscation and complexity in charging clients has made them rich indeed. In 2013, the financial services sector accounted for nearly 30% of U.S. corporate profits—a three-fold increase from 30 years earlier2. That’s an amazing transfer of wealth to a very small group of people.

To put it simply, the financial advice business has been a money train for most advisors. Those advisors, understandably, want to keep riding that money train as long as possible. But robos are making that harder and harder because they’re blowing away the confusion around services and fees.

Today’s consumers are learning that they can access a huge swath of the services traditional advisors have provided, all for a fraction of what they’ve been paying. The robo revolution has shown that these supposedly complex services can be handled much more cheaply through automation.

Firms like AdvicePeriod are betting on the future. Millennials—smart, demanding and bred on technology—now make up the largest segment of our workforce. And, they’re both cynical of the advisory industry and fickle.

As this generation begins to accumulate wealth, they’ll bring their business to the forward-looking advisors, forcing the industry to change. Before long, we believe, the old-school advisors will find that their money train has run out of steam.

1Source: Cerulli Associates
2Source: U.S. Bureau of Economic Analysis
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