Anyone who keeps tabs on financial services trends knows that one of the hottest topics in the industry of late is robo-advisors. Indeed, it has been hard to miss all the dire stories about how these automated advice platforms will massively disrupt the traditional wealth management business.
The conventional wisdom was that by using technology instead of people to do asset allocation at much lower price points, robo-advisors would win over tech-savvy millennials, tech-friendly Gen Xers, and other do-it-yourself investors.
With this downward pressure on pricing, if traditional advisors didn’t cut their fees (usually 1% of AUM per year), commentators opined that they’d be like small travel agencies going up against Expedia or Travelocity. This didn’t paint a pretty picture for firms.
But here’s the thing. The much-discussed disruption hasn’t yet materialized. Over the past year, we’ve seen no evidence—no stories in trade publications or analyst reports—about traditional advisors cutting their fees or having difficulty competing.
What’s going on here? Why aren’t we seeing the “Uber-ization” of wealth management?
One reason is that instead of automated advice being a competitive threat, more traditional advisors are in position to incorporate some form of robo functionality in their practices. In some cases, large firms like Charles Schwab and Vanguard Group have come out with their own robos. More recently, as reported in the Wall Street Journal, Fidelity is testing a new automated, online investment advice platform. On other cases, firms have gone the acquisition route. Examples includes BlackRock’s purchase of FutureAdvisor, and more recently, Invesco buying Jemstep.
Fast-forward a year or two, when many more traditional advisors have robo functions in their toolkits, how will advisors differentiate and compete—and justify their 1% fees?
It seems clear that with the growing complexities and challenges of investing and pursuing other financial goals, clients are going to want broader and more in-depth financial services, especially as they build significant wealth. In other words, clients are going to be looking for more of a financial planner than an advisor.
To develop competitive advantages and differentiate their services, a sound strategy for advisors is to chart a path toward a financial planning practice. That will involve branching out to cover areas including retirement planning, education funding, and insurance. It also likely means partnering with or bringing on a CPA to handle clients’ tax and estate planning needs.
To make these changes, wealth managers, RIAs and individual advisors will need to invest in additional staff, as well as education and certification programs, all of which will need to be managed closely.
While making these changes may be difficult and expensive, it’s a good way for wealth advisory firms and individual practitioners to ensure that they’ll be able to justify their 1% of AUM fees with clients in the future.
When there’s a competing service that’s readily available and offered at a quarter of the price of your offering, you’ve got to make changes and ramp up your value delivery to hold your ground on price.
If financial advisors don’t want to expand into the financial planning arena, they’re going to have to figure out another way to continue to command their 1% fees. If they don’t, over time their investors will leave, and their practices will shrink and likely fail.