The biggest players in digital advice are also fund providers: Vanguard's Personal Advisor Services manages over $45 billion, while Schwab counts over $10 billion in AUM through its Intelligent Portfolios offerings.
Though other asset managers are keen to emulate such success, a deeper understanding of how to deploy robo technology to advisers is needed if a firm plans on offering a digital institutional solution, says Envestnet CEO Jud Bergman.
There's also a potential opportunity to provide outsourced advice solutions to advisers, Bergman acknowledges, though the technology provider has not done any work in that regard, he says.
Speaking with Money Management Executive, Bergman shares the insight gained from being an account aggregator, asset manager and powering billions in managed accounts. An edited transcript of the conversation follows.
How should advisers enhance their practice with robo technology?
We view that advice is best rendered to high-net-worth and affluent individuals around an adviser that is supported by the best technology.
An adviser-centric technology niche deliverable is what most high-net-worth and affluent investors want. And so, this framework of powerful technology that is adviser-centric is an important one, because technology at one level can be viewed as the brilliant idiot. That means there is tremendous power in leveraging the kind of calculations and raw computing power that computers have.
Let's leave artificial intelligence aside for the moment. It's coming to financial services and making great strides, but there are simply activities that add value for an adviser that an adviser should not be doing on their own. One example is systematic rebalancing, one of the five pillars of adviser alpha.
We have the benefit of millions of investment accounts that advisers have entrusted to us, and being able to see performance over time from different practice patterns. We measured the value of systematic rebalancing for those advisers and investors who benefitted from it - those advisers who had did it in '07, '08 and '09, and for those accounts that were continuous accounts by the end of 2015.
We found that while systematic rebalancing in most markets adds between 40 and 50 basis points per year in value — it's by the way also a risk mitigator, so the alpha has been done with lower volatility, which is also a good thing — there are particular times where it is much more than that. In '08 and '09 we of course had a lot of volatility. It was a time where rebalancing added very much value, even though it was probably psychologically much harder to do that.
By the end of 2015, those accounts that had benefitted from systematic rebalancing had a 1,550-basis point advantage over those that did not. That's remarkable, but what is troubling is that in that same period, less than 35% of advisers systematically balanced accounts. Some didn't have the tools. Some did it, but didn't do it systematically.
When I was an adviser I used to shut my practice down for the month of August and I did household rebalancing across all accounts. It took me weeks. Now instead of doing it once a year I do it twice a year, some do it four times a year, and now it takes several hours instead of several weeks.
What's the lesson that Envestnet sees for advisers to heed then?
The approach that we lay out is something that we call the Kasparov Principle - the notion that Garry Kasparov, the greatest chess player that ever lived, discovered in his life as a competitive chess player where he found through his advanced chess or his freestyle chess tournaments where all comers could take part. You could enter a super computer or you could enter with individuals aided by computers. In the early days it was amateurs aided by PCs that won against grand masters and super computers with this notion that humans plus technology deliver better outcomes than humans or technology alone can.
Said a little differently, experts plus machines deliver better outcomes than experts or machines alone.
This Kasparov Principle is a framework from which advisers, we think, ought to look at how they render advice, how they manage portfolios and manage client relationships going forward. What are the areas that the brilliant idiots of computer software can do better, and what are the areas that the human expert can do better? This is what Kasparov understood and what the best advisers understand. There are some things that humans do better than computers and vice versa.
There are many considerations now -tech upgrades, regulatory demands, new compeition. Would you say a practice is challenged on multiple levels?
It's a challenge that is self-navigated with the thoughtful and intentional deployment of technology.
Fee-only advisers have been acting as fiduciaries exclusively for many years. Even so, they now have a regulatory challenge for certain IRA accounts, and even more so are the challenges for what have been hybrid advisers — advisers who may have their own RIA but are affiliated with a broker dealer for the commission based, or transaction based compensation portions of their practice.
The practice pattern that is most challenged now is the commissioned based during an exclusively transaction based adviser. Again though, in this environment, the post-Labor Department environment, the importance of technology and productivity leverage, which is outlined in this study, becomes mission critical. How is it that a commission-based adviser, or even a hybrid adviser — who both has fee-based business and commission-based business — know their clients in a way that enables them to render best interest advice?
For me it took weeks to pull everything together. By the time I had it all the advisers said it was out of date. So take something that is just the simple process of understanding your client in the context of a financial plan — technology is just about to take the onboarding process and know your client process from the period of weeks or months to a time of moments or hours. It's the warp speed acceleration of the client onboarding, and that's a quantitative enhancement for the adviser to know their client, because instead of using a shoebox they are using aggregation technology, personal financial management apps and rules-based financial planning that then presents a picture of a client where all of their assets, liabilities and spending is presented in analytics that not only the client can fully understand, but enables the adviser to present appropriate strategies — portfolio construction, asset allocation — that leads with the goals, objectives and the risk tolerances of that client.
It is disruptive and it requires a change in the practice, now is the time that technology becomes even more important. And integrated technology becomes essential because the findings that come from the data aggregation across all assessment accounts, that flows into a financial plan, that integrates to the investment piece, having that be integrated is essential as opposed to having the data aggregation to be scored into a financial plan by the adviser and then having that financial plan not integrate into your investment program.
Are you looking at any firms at this time to bring into Envestnet?
We don't expect to do any major strategic transactions for the foreseeable future, but there may be modest additional investments that we would look to make. If we find that there is an opportunity to do a transaction that is more consolidated but enables us to leverage core operated capability that we have of doing large and complex conversions. So, it may be a way for us to leverage that. We will continue to look, but there's nothing that we have that's disposable at this point.
How has competition evolved over the last year?
It's the most exciting time that I've ever been in the business. All these firms understand the power of technology.
There are more solutions and more choices at the hands of savvy and successful advisers than there ever have been. I think there are some challenges that are posed by the DoL, but those advisers that successfully navigate those challenges over the next couple of years, and who make the right technology choices, I think are going to find that this is a very good business for them for many years to come.
I think that the competitive environment is very rich and is bringing new investment, new capital and new solutions to advisers.
The hybrid robo model is fast gaining currency among fund providers. Vanguard and Schwab are now at the center of it. Would Envestnet ever consider providing support for advice over the phone?
We have no present plans, but we have a number of advisers who have asked, "As I extend my firm and brand into this area on smaller accounts, could you be some help in terms of servicing those accounts?" And of course, we have said yes on a number of fronts, but we have not yet made any decisions or commitments to go further, although we have been asked by several firms to provide more services for those advisory practices in the context of the digital offering.
Would this be a call center where advisers could outsource some clients?
It is less of that and more support for the technology tools that are investor facing. When an adviser adopts the data aggregation and personal financial management apps that then flow into a financial planning app, there are questions that their investors have that are application oriented — simple questions about how this works or how to interpret this? It would be right up to the question about advice, but there's a blurry line that advisers are looking for some help in supporting.
Would Envestnet consider a call center that puts advisers in the center?
Our digital solution is adopted and being adopted for firms that want to have a digital solution for small IRA accounts. By taking our digital solution there, we will be able to take accounts that advisers won't find cost effective and they can turn those accounts into advisory accounts for the firm. That digital solution is a very cost-effective way to address small accounts and we already have that.
I don't believe that business model can be expanded into something that works for sophisticated large accounts. I think sophisticated large accounts are best serviced in an adviser centric model that leverages technology and that doesn't rely only on technology.