Independent B-Ds Faulted in Robo Race

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Most of the financial services industry seems to have caught robo fever. Custodians, led by Charles Schwab, are beginning to aggressively roll out their own automated digital services; RIAs are also signing up for white-label services provided by firms like Betterment and Jemstep. 

Yet most independent broker-dealers are still approaching automated investment advice with extreme caution.

Neither ignoring the phenomenon nor embracing it rapidly, the IBDs are being "purposefully indecisive," says Celent senior analyst Will Trout. "They are playing a watch-and-wait game, looking to see if the robo advice phenomenon is a fad or a real evolution in the way investments advice is delivered."

But sitting on the fence may be ill-advised, he cautions. "It represents a missed opportunity for IBDs," Trout explains, "as the automated investments advice business is a rapidly evolving space and it will be hard for IBDs to catch up with the next phase of automated investing."


One that has made a move is Northwestern Mutual -- the No. 7 independent B-D in last year's FP50 ranking -- which in March inked a deal to acquire LearnVest, citing the startup's "breakthrough technology" as a top reason for the deal.

Yet some of the other big firms, such as No. 3 Raymond James Financial Services, are openly skeptical about the role that robos can play in their business.

Asked recently where automated advice fits into the company's future, Scott Curtis, president of the firm's independent broker-dealer channel, said that it doesn't: "We're betting on financial advisors and personalized financial advice delivered by people."

Others, such as Commonwealth Financial Network, appear more willing to incorporate robo services, but have not have not announced any rollout plans. "We have to demonstrate real technological prowess," says Commonwealth CEO Wayne Bloom, "and can't be whistling past the graveyard."

But clients, especially baby boomers, "also want human interaction," Bloom says. "Technology is not yet at the point where it threatens the personal values an advisor brings. Being able to help when there's market volatility, a family dispute or wealth transfer is more important than squeezing 80 bps [out of a fee.]"


Outside observers warn the big IBDs against inertia.

The firms need to realize that automated digital services are "not necessarily a threat," says Aite Group research analyst Bill Butterfield. "Discount brokers didn't put the wirehouses out of business and Diet Coke didn't hurt Coca-Cola, but expanded the market. IBDs all need to be aware of what others are doing ... and they need to make a competitive offer."

Yet the big firms are fearful of generating channel conflict with their advisors, whom the IBDs are desperately trying to retain, Trout says; they are also keeping a watchful eye on infrastructure expenses.

And few IBDs do have immediate plans for digital offerings, although several are talking a good game.

Digital technology will be "a very important part of our service offering going forward," says Larry Roth, chief executive of Cetera Financial Group, the industry's largest IBD network, adding that demographic and lifestyle changes will dictate the need for "great tools."

"If we want to win, we will have to invest heavily in technology, advisors and risk management," Roth says. "We know there are tech-based providers out there who would love to eat our lunch."

To accomplish this, Cetera plans to either build its own tools, acquire software companies or integrate with a third party, says Cetera's new chief operating officer, David Ballard. Cetera has begun analyzing what to do next, Ballard says, but is still "a little unclear" how it will ultimately deliver robo services.


Two other big networks, AIG Advisor Group and Ladenburg Thalmann, say they are considering tech acquisitions to advance their digital services. "We have to invest in some exciting ideas, and we will," says Advisor Group CEO Erica McGinnis.

But will such deals be too late? Pershing managing director Jim Roth notes that independent B-Ds "have never been quick to adopt" new technologies. Now, he says, in the fast-dawning era of automated services, they will "have to play catch up."

IBDs need to take a page from the playbook of online brokers like Schwab and TradeKing, says Celent's Trout, launching digital platforms "that will allow them to serve the less affluent investor population and let their real life advisors focus on their most profitable clients, who are growing at a roughly 5% clip annually."

Robo offerings can complement the advisor's real-life relationship management capabilities with services such as automated account openings and portfolio management by algorithm, he points out. "This kind of blended delivery model represents the future of automated investment advice," Trout says.

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