The early fear around robo advisors was that they would perform the work of human advisors — and at a fraction of the cost. Yet in practice, robos have failed to capture even 0.1% market share of consumers’ investable assets. Nonetheless, this failure doesn’t mean technology won’t fundamentally reshape how our firms operate.
The total U.S. investable market space is upwards of $35 trillion to $40 trillion, but robos claim something on the order of 0.06% market share of investable assets. That seems a fairly clear answer to whether robo advisors will replace humans in the mainstream. And while it’s easy to grow complacent in the face of such data, that doesn’t account for the very real impact that robos will have on certain sectors of the advisory trade, particularly on what we’d consider the back office.
At a very high level, we can break jobs in advisory firms into two categories. Front office jobs are client-facing. By and large that’s us, sitting across the table from the people we service.
By contrast, back office jobs comprise most of the operations and administrative roles in the firm: portfolio trading, account openings and transfers, insurance annuity applications, scheduling meetings and so on. Jobs that require handling a lot of paperwork and ensuring important tasks actually happen the way that they need to is the back office’s realm. These roles are crucial for delivering the services that we say we’re going to deliver.
Some people add in a third category as well called the middle office, which basically refers to jobs that hold the firm together as a business. These positions are not necessarily about doing client work or supporting or seeing clients. Instead, maybe it’s planning or investment research, compliance and oversight, and so forth.
While back office jobs are absolutely crucial, their repetitive nature is the very thing that puts them at risk.
Take the process of implementing a client’s portfolio. At the outset of my career, my second job was as a paraplanner and operations associate at a firm. Allocating client portfolios was a hands-on, labor-intensive process. First we’d look at just what the client’s positions were, and to do that we’d have to pull statements because we didn’t have good software for downloading that material. And every client had different investments because we weren’t very standardized back then.
We’d then manually enter their current asset allocations in a templated spreadsheet. This was the output that we’d give to clients. Then we’d pull Morningstar Principia Pro reports — the predecessor to the current Morningstar research platform — analyzing each fund and seeing how it was performing. Then, if something didn’t look good, we’d have to research and find an alternative to fit that particular part of the asset allocation pie.
We’d then have to figure out if there was a rebalancing trade or a change, exactly what the trade was going to be, manually calculate any capital gains implications and then craft a recommendation that we could then take to the client in the meeting. Pending the client’s approval, we’d then log in to the early version of the custodian’s website to submit the trade order, typing in one ticker symbol at a time, with the dollar amount or the shares.
Still with me? We’d then come back the next day when the trade settled, and do the purchase. That’s because we didn’t have an easy way to see if the mutual fund was going to be up and down during the day, so we didn’t know how much of the replacement order to buy until the prior sale occurred. It was a multi-day, completely manual process. Switching back and forth between spreadsheets, trading platform and Morningstar research tools took three days. Consequently, any advisor with a good-sized client base had their own full-time assistant just to handle basic rebalancing.
But now, with modern rebalancing software, you can create standardized models, apply them as a template to each client, have the software automatically monitor and track every client, tell you who needs to rebalance, what the capital gains implications are, automatically work up the trade order, write dollar amounts, write share amounts and write account numbers. One trader can hit the button and do this for 1,000 clients at once. It may take an hour or two. And most of that time is dedicated just to verifying the software queued up the trades properly as a compliance review.
Whereas a dozen advisors might have needed a dozen staff members to do the trading, it’s now just one person and a piece of software. The advent of rebalancing software probably destroyed thousands of trader and advisor assistant jobs, and the more technology marches on, the more we’ll see this happen.
In fact, it’s already happening. With robo onboarding tools, fewer staff members are needed to do account openings and transfers. With online scheduling apps, an assistant is no longer needed to schedule all those client appointments. But those features weren’t our value proposition in the first place.
Indeed, I’d argue that all this technology elevates the value of the advisor. Since clients no longer have to contact us to handle rote administrative tasks, they call us instead for the advice they need. But in the process, back office jobs start to go away.
MOVING UP FRONT
From the advisor’s perspective, I think this is good news. It means we’re more efficient. It means we can spend more time actually focusing on interactions with clients. At a firm level we’re more profitable, meaning we can spend more dollars on more front office staff. All of these developments are very positive from the advisor perspective.
However, if you are in that trader, sales assistant or administrative position, technology will hurt your long-term prospects. In the near term there may just be a reshuffling of duties. People charged with administrative tasks will now perform them for more clients because the technology will have made them more efficient. Those efficiencies may lead to some job duties getting rejiggered over time, if not necessarily the loss of the jobs themselves.
But if you are in a firm that is not growing, you need a plan.
Option No. 1 is to try to move up the administrative side of the organization. If the technology makes repetitive tasks easier, do the non-repetitive tasks, i.e., higher-level investment research, management jobs, human resources, executive leadership, etc. Those middle office jobs remain a path forward for more income and more responsibility, with a caveat that not everyone is necessarily going to have the room to move up because there are usually fewer middle office jobs than back-office jobs.
Option No. 2 is to try moving into a client-facing role and becoming an advisor. This means eventually pursuing CFP marks yourself, or at least starting down that road. The College for Financial Planning has what they call the Registered Paraplanner designation, which they actually recently rebranded, and it’s now Financial Paraplanner Qualified Professional or FPQP, which lets you learn the skills you need to be a paraplanner and start working as an associate under another advisor. Then, perhaps over time, you can get your CFP marks or the technical skills to become a planner and the relationship skills and the business development skills as you move up.
The caveat to all of this is that you have to be at a firm that’s willing to create these opportunities. That’s why I’m such a strong advocate of asking yourself whether your firm is growing. If yes, then future opportunities will emerge. If no, it will be difficult to move anywhere but out the door.
So what do you think? Are robots a threat to back office jobs? Are middle office jobs safe from being taken over by technology? How will typical responsibilities shift as technology progresses? Please share your thoughts in the comments below.