Any Trekkies reading this headline already have visions of the Borg, some of the worst baddies in the Star Trek universe. For those unfamiliar with the voyages of the starship Enterprise, the Borg are part humanoid, part machine cyborgs that swallow up — or in their words, "assimilate" —any civilization in their path, incorporating it into their hive-mind known as the "collective."

In our industry, robo advisors are much like the Borg, and financial planners who choose to resist or deny their technology may soon find themselves in a rapidly shrinking client universe.

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In our industry, robo advisors are much like the Borg, and financial planners who choose to resist or deny their technology may soon find themselves in a rapidly shrinking client universe.
Actor Levar Burton gestures during a Star Trek video game event in 2016.
Actor Levar Burton gestures during a Star Trek video game event in 2016. Bloomberg News

A RECENT HISTORY LESSON
A little over a year ago, I wrote in Financial Planning, "Don’t Be Afraid of Robo Advisors." In that article, I made the case for the importance of the human touch when advising clients about their wealth, especially during negative market conditions. As I said then, “So far, algorithms can’t take us by the hand or sit down over lunch to reinforce long-term goals… As long as personal conversation is valued, my practice will not be threatened by robos.” I still stand by those statements; nothing will ever fully replace the value of a human being who can understand another human’s anxieties, goals, dreams, and strategies.

But I also noted that the research firm Cerulli Associates predicted that by 2020, assets managed by robo advising platforms would grow to $489 billion, up 2500% from $18.7 billion in 2015. And, as surprising as this forecast may seem, there are even more aggressive projections out there: Business Insider estimates that worldwide assets under management by robo advisors will reach $8 trillion by 2020.

HOW TO SURF A TSUNAMI?
Technology-driven investment platforms are clearly not a passing fad. They are quickly becoming the vehicle of choice for millions of investors — especially tech-savvy millennials. And it’s not only 20- and 30-somethings; Gen Xers and baby boomers are also embracing the notion that technology can deliver investment advantages in both value and cost.

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Technology-driven investment platforms are clearly not a passing fad. They are quickly becoming the vehicle of choice for millions of investors.

Given these shifts in the landscape, I recently decided to incorporate a robo advising component into my practice. I opted to use RobustWealth in order to reach a class of investors that would have been impractical for me to serve in a one-on-one capacity (full disclosure: I am on the advisory board for RobustWealth).

RobustWealth utilizes an open-architecture approach that gives me the ability to offer clients with smaller portfolios the same mutual funds and research services that I would have previously been able to make available only to those with at least $1 million in AUM.

Additionally, RobustWealth can handle billing and remittance, portfolio rebalancing, and online account opening and management. They can also offer customized, goal-based portfolio construction. The platform harnesses cutting-edge data analytics to help clients glide from their starting portfolio to their ending portfolio, adjusting risk factors as the client approaches their determined goal.

All of this can be wrapped in a container that is indistinguishable from my firm. It's a white-label platform that allows me to customize and brand these services in a way that is unique to my practice.

AND THE FIELD IS GROWING ...
This isn't the only option available for clients. Many of the largest names in the industry have launched or are mulling robo advising platforms. The options range from beginner sites like Acorns, Stash, Betterment and Hedgeable (each with a minimum required investment of $0 to $5) to those like Wealthfront, Liftoff, Schwab's Intelligent Portfolios and Ally Invest (formerly TradeKing) that require $500 to $5,000 to get started. Advisory fees range 0.25%–0.4% (some may charge a flat monthly fee for accounts under a certain amount) and other fees may be assessed for various services.

Beyond the services above, which are geared primarily to DIY investors inclined to bypass traditional financial advising relationships in favor of reduced expenses, many firms, like RobustWealth, are providing white-label services to RIAs and other advisors. Betterment Institutional (the same company mentioned above, but scaled for use by professional advisors), Fidelity Institutional Wealth Service and Schwab Institutional Intelligent Portfolios are just three of the many enterprises aimed at helping financial advisors retool their offerings to appeal to younger investors or those without the assets to qualify for more traditional services.

A FEW CAUTIONS
While fusing the human side of your business with robo technology has its advantages, there are also some things advisors should be wary of:

  • FEE STRUCTURE: As I have worked through my own process, I have given careful thought to the fee structure for clients utilizing my robo advising platform. Most of us who have endured the trials and tribulations of establishing a fee-based practice know the frustrations that come with trying to strike just the right balance between value and cost. Even when we have established strong interpersonal relationships with our clients, it’s not easy to go back and say, “I need to raise my fees.” This is likely to be even more difficult in the robo world, where we are dealing with clients who have not (yet) experienced the high-touch aspect of our advising services.
  • DIFFERENTIATION: It's also important for advisors to avoid cannibalizing their highest AUM accounts. Thus, clearly differentiating (and communicating) the deliverables and levels of service available on the robo platform — whether categorized by AUM or some other criteria — will be essential. High-net-worth clients who are the foundation of our practices should not be tempted by the low fees of a robo advising platform. Instead, advisors should emphasize and deliver the higher levels of service and attention those clients expect.
  • TRIAL BY FIRE: Robo advisors have yet to be tested by a serious or prolonged bear market. As we learned from the Flash Crash of 2010, technological advances can have unintended side effects. So, advisors who integrate robo advising into their practices will need to be attentive as we move forward; robo advising is not cruise control for portfolios. We need to continue to carefully consider how to meld the human touch with the high-tech advantage.

All this being said, I still believe, as I wrote previously, that we should not fear robo advisors. In fact, I believe that the forward-thinking advisor can embrace them, with full recognition of both their value and their challenges.

In the brave new world of investment advising, robo advisors are one more tool we can use to help our clients — and our practices — to “live long and prosper.”

Kimberly Foss

Kimberly Foss

Kimberly Foss, CFP, CPWA, is a Financial Planning columnist and founder of Empyrion Wealth Management in California and New York. She’s also the New York Times best-selling author of Wealth by Design. Follow her on Twitter at @KimberlyFossCFP.