Schwab surprised the industry with the recent launch of a hybrid robo adviser offering, since it had already two operational digital platforms with over $10 billion in AUM — Schwab Intelligent Portfolios and Schwab Institutional Intelligent Portfolios.

In a panel discussion organized by Schwab at its latest Impact conference, in San Diego, Michael Heburn, chief operating officer of Buffalo, New York-based Level Financial Advisors; Philip Kessler, managing partner of Columbus, Ohio-based SWS Partners, and Cam Goodwin, CEO and managing partner of Franklin, Tennessee-based HawsGoodwin Financial, gathered to talk about their experiences in utilizing the firm's institutional offering.

An edited transcript of the conversation follows.

A number of advisers say they are afraid of the implications of robo advice. Do you wish you didn't have to adopt this technology at all in the first place?

Heburn: First of all, we're not scared of it. We didn't look at it as this coming gloom and doom of robotic investment management that's going to put us out of business. We really looked at it as an opportunity to reach a whole different segment of clientele efficiently in a way [where] we could eventually make money.

I think what you're seeing now is people are coming to grips — I think a year ago people were very afraid of it. We thought it would just be a great way to embrace technology. We also thought that it was inevitable, that being afraid of it doesn't make any sense because it's not going away. It's going to be there. Just like any other business you have to figure out new ways to be entrepreneurial and come up with ways of providing value to your clients. This is just one example of that.

Kessler: We actually sought it out. We were building the business model for SWS partners. It was, "We have to have this." One of the reasons we ended up at Schwab was they have it. We have it built into the business model from day one just because we know over time that's going to be a much larger portion of what we do than what we don't do.

Goodwin: We have just decided to embrace this technology too. When we started our firm, we came from a large wirehouse where we were solely focused on high net worth investors just like everybody else. We knew that there was a large underserved market out there.

We call them the emerging investors that are kind of that next level of clients. They were just not getting the service they deserved. We always wanted to work with that client segment but the technology wasn't there. Once that [client] started coming out, we went through a search to seek out the technology. Schwab's Institutional Intelligent Portfolio was what we landed on.

Kessler: To your point, I think as you look at the marketplace you have to really think about who you are and what you do; because if all you offer is a portfolio of 15 mutual funds on top of the 1% and some rebalancing, yeah, you should be afraid. That's your value prop because the machine can do that much more efficiently and much cheaper.

In a way I see it as a good thing for the industry because it's going to help those of us who can provide real value beyond rebalancing and stacking mutual funds. It'll allow us to be a differentiator in the marketplace where before it was all kind of the same flavors of the same ice cream.

(From left) Michael Heburn, chief operating officer, Level Financial Advisors, Philip Kessler, Managing Partner, SWS Partners, and Cam Goodwin, CEO and managing partner of HawsGoodwin Financial, discuss how they have integrated a digital platform into their practice.
(From left) Michael Heburn, chief operating officer, Level Financial Advisors, Philip Kessler, Managing Partner, SWS Partners, and Cam Goodwin, CEO and managing partner of HawsGoodwin Financial, discuss how they have integrated a digital platform into their practice.

There's concern too that robo advice will commoditize some aspects of financial advice.

Heburn: We were unique in the sense that we charge the exact same amount for this offering as we do our other offerings, with the idea that folks will graduate to a higher level of service as their lives became more complicated and their assets grow.

It forced us to take a really hard look at financial planning and what we're providing. That's the real value in what we do anyways. As far as I'm concerned, investment management will become a very, very small portion of what we do in the future. It will be a commodity beyond all commodities I think in our business.

We're getting busy trying to figure out what value we can really bring currently, spelling out what we really give people now quality-wise on the financial planning side and what are we not giving people now that we could be giving in the future so that we don't face fee compression somewhere down the line.

I think any business goes through this. You have to continually reinvent yourself and come up with new ways of showing value to clients. Otherwise, you will face smaller fees in the future. If we keep everything the same then definitely the fees will go down. There's no way around it. If you continually bring things into the fold and offer more value and demonstrate that, then your fees can stay the same or maybe in some cases even go up.

Kessler: We don't consider Betterment or Wealthfront competitors actually. They're playing in an entirely different field of service than we are. We're giving a dedicated adviser and a personal relationship. When someone brings them up to us, we're like, "Well, we don't really consider them to be a competitor." If that's what you want you should definitely go get that. They're offering something completely different than what our value proposition is.

There are firms out there that are creating their own technologies. It's not really advice that you're competing with. It's a competition based on technology — and somebody else can always build a better mouse trap.

Kessler: I actually think that argument is a red herring. Either you can run your business profitably and have enough value to validate what somebody pays you, or you can't. I don't think it's any more complicated than that. If you look at your fee and you're afraid of it, that tells you something about your business model. I can justify every dime you pay us. I can do it efficiently and quickly. If you can't...

Do you feel your advice in this offering is still unique? What about the concerns about differentiating your service from others?

Kessler: To say that the machine is going to give advice — the machine doesn't give advice. It does what it's told to do. It does it really efficiently and really well at an exceptionally low cost. The machine isn't giving you advice. I understand the CEO of Betterment came out and like some 25-year-old kind would [announced] everybody is going to machines, like computers were invented yesterday. What do you notice about that website today? What content isn't on it?

Goodwin: I would agree. We still think that there's still a big connection between clients and getting to know a personal adviser who's going to hold their hand through and get to know their lives, get to know their family life, really connect with them and help them grow wealth over time. I think that's what the Betterments of the world are missing.

How have you implemented that human touch?

Goodwin: They get access to a certified financial planner when they sign up with prosperHG. They get a financial plan from day one. That adviser will be in touch with them on a semi-annual basis reaching out to them to do reviews to make sure they're still on track with that plan that they have in place. Then they also have free reign to access that same adviser. They're not calling an 800-number to bounce ideas off of and seek advice.

Kessler: Our view was that what you get from an advice and service standpoint is the same regardless of how we manage the money, whether it's automated or not. That was just how we built the business model. We constructed the firm around the idea of everyone having the highest and best use. I'm not asking one guy to build a portfolio, rebalance a portfolio, be a financial adviser and go out and grow a book of business. We broke all those component pieces apart. Then we hire people that do whatever it is that needs to get done.

Heburn: The segment we set up has a small amount of assets under management to begin with, so it's people with $250,000 or less. The type of financial planning typically that they need is going to be a lot different than our $1 million, $2 million or $5 million clients.

We're able to provide them some what we call base financial planning upfront, some retirement projections and answer questions for them about how to set up their portfolios. What we're hoping is that it's a long-term play, that these are professional high-earners who are going to build wealth and eventually get to a point where they're really going to need some serious help. We think it's just an entry-level way to get the relationship started. It's more marketing than anything else for us. We're not going to make a ton of money on this entry-level program.

Goodwin: Our effort in launching this is really to cultivate our future clients for our firm. We have a very specific target client for prosperHG — as I said, we call them the emerging investors. We think they are going to be the next clients for our firm. We want to develop that relationship with them early. We know they're not all going to become wealth management clients. We've priced our [offering] considerably lower than our wealth management side, at 50 basis points.

Heburn: We're specifically seeking out people that we think will be wealth management clients down the line. If we have an 80-year-old client who is taking money and distributions and they want to go — and somebody comes to me and says, "Well, we want to put them into this platform," we might say no to that. They're not a future client for us. They're just putting their money somewhere. That's not a good fit for our core business and what we're really trying to do.

We're trying to build something for people. I think for someone like that who doesn't need a lot of planning in the future and they're in distribution mode, there are other alternatives for them. Maybe Wealthfront is a good alternative for them or just some type of Vanguard fund that they can put their money in or something. We definitely are seeking out people that are going to grow. That's what we're very interested in. I can't foresee 10 years from now [that] sort of investment management not being completely automated in some format.

Adopting the digital advice platform, are you noticing any change in the client / adviser relationship?

Kessler: It's like you almost get to know your client again, if it's an existing client. When given access to these kinds of tools, to mobility and to information some behaviors do change, right? So they don't feel the need to call you every time the market goes down 5%, they don't need to call you because they're going to snap a picture of a check to fund their IRA. In a way we get more substantive conversations because I'm not dealing with somebody having to listen to CNBC and freaking out because they haven't gotten their statement for the month yet and are wondering what's happening with their portfolio.

Heburn: I do think there's change going on and it's generational and cultural. I think the people that we're putting in our Blueprint platform are less likely to want to meet with us. They want information. They want it in shorter batches. They want decision-ready analytics. They want information they can say yes or no to. I think that's just a natural evolution of society.

There is a shifting away from this focus on performance to more of a focus on achieving certain milestones. I think if you looked at the investment advisory field 10 years ago everybody was, "Performance, performance, performance." I think now people are looking at it a little bit differently. I think the younger generations want to reach goals and they want to know how they're going to get there.

How do you get intimate with 200 people if you have 200 clients? I think you have to have really good systems in place to capture information so that you can cut to the chase. Bring that information back out again when you talk to the person so you can connect on a personal level. That's where the trust comes from. Once you have that then you can talk about anything. Without the trust I think it would be very hard to manage 200 relationships.

Kessler: It's [also] about costs. If you're paying your adviser 1% and then he's putting you in 12 mutual funds and that's another 85 basis points on top of the 1% then heaven forbid you're at a brokerage firm or you're paying 12 B1s and every other embedded fee, I don't care how good your performance is. For your clients to be successful, you're going to have to reduce the fees, but you're not going to be able to reduce the services that you provide them to get them to where they want to be. It's not an easy question. It's going to force a number of people out of the industry.

What do you tell your peers?

Heburn: The biggest thing I hear from peers is they worry about cannibalization and fee compression. The way we counsel them is we just say we think the right approach here is this is coming whether you like it or not. You've got to embrace it and figure out a way to make it work for you. We tell them what we've done. We think it's a model that will work long-term.

You can’t be afraid, no matter what it is. If it's e-signatures or automated investment or any other type of technology, you should seek it out. Find it. Then deal with what it does to your income statement afterwards. Your competition is going to do it. They're going to find it.

Kessler: That's the advice. If you don't somebody else will. If they find it before you do — I always use it as a negative example. If you and I are competing for the same plan and your all-in fee is 185 basis points and mine is 75 basis points … I will have that conversation all day every day, everything else being equal.

Goodwin: Cannibalization. That's the number one concern we hear from advisers. We are offering so much at a lower cost than our wealth management side. We just decided to embrace it. We've told all of our wealth management clients about it, if they want to switch over to prosperHG and are okay with that service model, we're happy to do it. We think we can still be profitable at that level. We decided to embrace it and I agree, it's coming. You need to embrace it or else it will eat you up.

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Suleman Din

Suleman Din

Suleman Din is technology editor of American Banker and Financial Planning. Follow him on Twitter at @sulemandn.