Tech Survey: Robos were expected to overtake planning. Here’s what actually happened
After almost a decade’s worth of predictions that robo advisors would storm the advice industry, the technology is still struggling to gain adoption among RIAs.
To be sure, advisor expectations are still high. According to the latest Financial Planning Tech Survey, advisors predict that robo advice will be one of the top technologies to change wealth management over the next three years. In the same survey, robos beat out other buzzy technologies like artificial intelligence and advanced risk profiling. By 2023, Aite Group predicts more than a trillion dollars will have flowed onto digital platforms as technology simplifies the process of managing investments online.
But in the here and now, just over one in 10 advisors uses a digital investment tool, according to the Financial Planning survey that went out to more than 350 independent RIAs, planners affiliated with broker-dealers and other advisors. In fact, adoption actually dropped 5 percentage points from last year among wealth managers.
For robo technology to take hold more aggressively, it will depend, in part, on its transformation from a single direct-to-client platform into a bionic advisor toolkit that automates back-office tasks, creates onboarding efficiencies and deepens online client experiences. Robo developers hope that in the coming years, advisors will continue to bolt on robo technology to gain access to the growing cache of digital assets, which are expected to surpass $1.26 trillion by 2023, according to Aite.
Except that, based on the way things are going, that’s just not going to happen. There isn’t a straightforward answer why, but the simplest one may be advisor shortsightedness.
It turns out that many clients are still willing to pay the traditional 1% fee on assets, with the median advisory fee for RIAs still hanging at a robust 98 basis points annually, according to a 2019 survey by RIA in a Box, a wealth management technology provider. For most advisors, the specter of fee compression is still on the horizon.
“At this time, I don’t think my clients are looking for me to have a robo,” says Chris Chen, a CFP with Insight Financial Strategists in Boston, who provides a digital advice option to clients. “In my experience, clients come to wealth managers because of the personal attention to their specific situations. Robos can’t do that.”
In his firm’s case, robo technology means bypassing the burdens of account-opening and onboarding by making the online experience easier, but Chen says his robo advisor is still working out other kinks like automating account transfers from outside providers.
“There is still a fair amount of hand holding,” Chen says. “It is not all robo yet.”
WATCHING AND WAITING
The advice business has been good for advisors, says Joe Ziemer, vice president of communications at the New York-based robo advisor Betterment. The established firms are simply going to take their time and see how everything “shakes out,” he adds.
“What you’re seeing is an industry that is trying to figure itself out,” Ziemer says. “Firms have been thinking about this for a really long time, and they’re still working out what that means.”
Betterment, the leading independent robo advisor, says it works with 500 RIA firms on its Betterment for Advisors network. The firm does not break down AUM on its advisor platform, but says it is currently managing $20 billion in assets on both its retail and business-to-business segments.
However, only one in five advisors is using a robo advisor or is in the process of adopting one, according to a separate Aite study of 400 advisors, fielded in the second quarter of this year. Almost half of the RIAs surveyed said they aren’t interested in leveraging a robo platform. With steady AUM fees and a robo technology that is still battling growing pains, independent advisors may simply not be able or willing to compete on price in the low-end emerging wealth marketplace. The typical robo client is generally between 25 and 40 years old holding less than $100,000 in assets available for investment.
“RIAs don’t see the profit in the short term,” says Scott Smith, a senior analyst at the consulting firm Cerulli Associates, based in Boston. “They don’t have a broken business.”
But with robo technology having proved successful for the large incumbents — like Vanguard and Schwab with $112 billion and $33 billion in AUM respectively — on digital platforms, advisors looking to gain scale may need to woo emerging wealth clients who have less investable assets per account but represent a growing digital channel.
If adoption numbers don’t improve, says Will Trout, a senior analyst at Celent, “the advisory community will find itself increasingly hollowed out,” and the independent channel may not enjoy the same successes that it has had over the previous decade.
Full-service wealth management firms currently manage just over 7% of the total digital assets, according to the Aite report. That will have to change, Trout says. In the next five years, full-service wealth management firms are projected to take on additional assets and make up almost 18% of total assets by 2023, according to the Aite study. If independent advisors have been reluctant to embrace the technology, other channels are beginning to fill that void. Discount brokerages are expected to top 46% of all digital assets by 2023, up from just 34% in 2018, according to Aite.
A prime example is Charles Schwab. The discount brokerage giant recently retooled its robo offering and switched to a subscription-based model for its premium Intelligent Portfolio accounts in an effort to shift toward younger clients. By rethinking its core business model, Schwab says it topped $1 billion in net new assets in the first three months the service was in operation.
“Ultimately, the advisor has to go through a business transformation and change they way the practice is operated,” says Alois Pirker, research director for Aite Group’s Wealth Management practice. “That’s incredibly hard to do.”
Mutual fund companies, including Vanguard and BlackRock, held the most assets with 42.1% of total digital AUM last year, according to the study. Advice startups like Betterment and Wealthfront accounted for just 15.9%. Even more ominously for the independent robos: all four of the market exits that are cited in the report — Hedgeable, SheCapital, IncomeClub and Bicycle — were startups. There is pushback from independent robo advisors.
“There is too much hype that adoption requires a change in business model,” Ziemer says.
He observes that some of the independent firms on Betterment’s platform serve the same types of clients they have previously, even after technology adoption. Ziemer also says that since portfolio management has largely been commoditized, advisors don’t need to build complex portfolios anymore and can maintain a similar business model using ETFs on an automated platform.
“This is still early days for robos working with advised clients and once there is widespread adoption, robo technology will just be the standard,” Ziemer says, although he admits that the adoption rates reported in the Financial Planning Tech Survey seem a “little light.”
A SECRET WEAPON
Robo technology can act as a secret weapon for RIAs, according to Trout. Automation has long been the instrument of choice for firms looking for growth and robo advisory platforms are particularly well suited to that end, he says. Robo tools check most of the boxes to increase efficiencies — risk profiling, paperless onboarding and portfolio maintenance — and are available to advisors at relatively low cost.
“We will see greater adoption as the economics of the business demand it,” Trout says. “It’s hard to justify doing any of those processes manually anymore.”
But that may be easier said than done. Firms that have made the most successful digital transformations have done so through thoughtful decision making. The most important task: analyzing one’s book of business. Advisors will have to optimize fee revenue by determining which types of clients are profitable in a full-service model and which are better served using automation.
“Without taking a hard look, you are really just shooting in the dark,” Trout says.
While advisors have been shielded from the worst of fee compression, digital platforms are offering wealth management products at bargain-basement prices that could soon affect how RIAs will have to price their own products and services, says Nick Hofer, the president of Boston Family Advisors.
“We are not seeing the robo adoption, but we are seeing robos influencing the industry,” Hofer says.
And while robo advisors may not be taking business away from the RIA, the tools, without question, have further compressed the margins, he says. Independent advisors may not be able to survive with their current fee model.
With fees hovering around 1% of AUM for now, advisors are increasingly operating on thinner margins. Long a staple of the financial planning services, asset management fees have been commoditized by new technologies and inexpensive robo platforms, which may soon push portfolio management fees even lower as well.
“Margins are being squeezed and portfolios are available for much cheaper now,” Pirker says. “Advisors need to provide more services to defend the same pricing model.”
With thinner margins, there are only two ways to boost profitability, he says. The first is to take on additional assets. The second is to use technology to bring down costs. Either way, technology plays a major role.
“Ultimately, that is the pressure point that RIAs will have to respond to if they want to stay in business. They will have to deal with it sooner or later,” Pirker maintains. “Digital will play a leading role in shaping those business models.”
Methodology: SourceMedia Research/Financial Planning conducted an online survey of more than 350 financial professionals during September and October of 2019. Qualified respondents offer financial planning services and investment advice. Vendors and service providers are excluded from the survey