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Digital financial advice platforms are proliferating, but there is one problem — hardly any financial advisers are using them.
From Morgan Stanley to Wells Fargo to LPL Financial, major broker dealers with thousands of advisers are developing software programs — dubbed “robo-advisers” — which automatically build portfolios for investors based on a series of questions covering risk tolerance and retirement plans.
For advisers, the software represents a cheap way to handle clients who do not meet their minimum asset requirements. However, the service is not catching on.
“I still think our industry is a people business,” says Steven Jolly, a Wells Fargo adviser in Fresno, California. “Who needs you if they haven’t built a relationship with you? Why would they reach out to you in their time of need?” says Mr Jolly, who manages about $200m in assets.
It appears many share his scepticism. A recent study by Practical Perspectives, a research and consulting company, found that adding a robo-adviser in the next 12 to 24 months was a “high priority” for only 7 per cent of advisers and more than 50 per cent said it was not a priority at all.
Currently, just 4 per cent of advisers use these online advice platforms, according to the survey of more than 850 advisers in January.
Advisers, however, are not totally opposed to robo advice, says Howard Schneider, president of the consultancy. They worry it does not fit into their business model and may undercut their personalised approach. But they also acknowledge that it represents the future and do not want to miss out. “There’s sort of this bipolar view of robo-advice,” he says.
Digital platforms could significantly increase a practice’s efficiency in handling less wealthy clients, Mr Schneider argues. Firms have a surplus of these “accommodation clients”, which, for example, could be the $50,000 account of the great aunt of a very wealthy client that the practice wants to keep happy, he says.
“In many cases, advisers will do that, begrudgingly, but they’ll do it for the bigger fish that they serve,” Mr Schneider says.
“They’d really like to put these smaller accounts on a more efficient platform like a robo-advice platform.”
Significant business growth opportunities exist with digital advice, says Cam Goodwin, a managing partner at HawsGoodwin Financial based near Nashville. His firm was one of the first to employ Schwab’s Institutional Intelligent Portfolios digital platform after it debuted in June. He says adoption of the service could provide “a growth engine” for his business, by acting as a vehicle “that allows us to develop relationships with investors earlier in their lives and help set them on a path to build wealth and eventually get to our wealth management side”.
Investors who sign up for the robo also get access to a financial adviser and a certified financial planner. “It’s a great thing for the industry, and we’ve decided to embrace it and not fight it,” he says.
Mr Goodwin’s practice manages nearly $250m in assets. He would not say what portion of that was in robo-advice nor would he reveal how many customers were on the digital advice platform.
The firm has actively pursued young professionals in the greater Nashville area for the digital offering. Mr Goodwin has found these “emerging investors” at networking events for accountants and lawyers, he says.
Initially Mr Goodwin thought the typical client would be a late-20s-to-early-30s millennial, but found they are mostly in their late 30s with a family and “rollover dollars” from 401(k) retirement plans at prior jobs.
At HawsGoodwin, the minimum account size required to work with its wealth management side is generally $500,000, Mr Goodwin says. And many robo clients have made it a goal to cross over to the full-service option at some point in their lives, he says. “Smaller relationships historically have not gotten [the] attention or the focus that they need, and so we’ve always wanted to serve that market,” Mr Goodwin says.
A few recent acquisitions are expected to lead to an increase in the use of robo-advisers. Asset managers BlackRock and Invesco have purchased robos FutureAdvisor and Jemstep respectively in about the last six months. Already BlackRock has signed licensing agreements with BBVA Compass and RBC Wealth Management.
Jeff Goldstein, an adviser in Beverly Hills, is part of RBC Wealth Management’s pilot programme for FutureAdvisor.
He intends to use the robo as an add-on when providing 401(k) services to businesses, in handling less wealthy referrals from top clients and also managing money for existing clients’ children, for example.
He says many of the clients he meets are in the early stages of building wealth and are unlikely to become full-service clients for 20 years. “The key is establishing those relationships early,” he says.
Mr Goldstein is part of a team that oversees about $1.5bn in assets, where the firm’s senior partners do not take on accounts of less than $5m. He agrees the robo represents a nice introduction to financial advice for those who do not meet the asset minimum, but likely will one day, he says.
“It fills a void, it fills a need,” Mr Goldstein says. “Quite frankly, there are many people out there who need financial advice that a digital adviser can provide that otherwise simply would not get it.”