As stocks soared to record highs over the past decade, robo advisors amassed billions of dollars in investable assets. But now with the onset of ominous market indicators and volatility, advisors say they are worried about how automated investment platforms will perform during a major market downturn and what that might mean for their bottom lines.
“It is a wild unknown,” says Josh Pace, president of the custodian TCA by E-Trade.
Because they use passive investment products that track the markets, robos may underperform in a sustained bear market. Without the traditional hand holding from human advisors, nervous clients may pull investable assets off these automated platforms.
"The advent of the robo has occurred in a bull market and how long the market runs remains to be seen,” Pace says.
While robos seemed poised to dominate financial advice a few short years ago, savvy financial planners have since found ways to demonstrate their value to clients, he says. One way is by incorporating new technologies that collect all of a client’s financial picture in one place.
“Account aggregation is far and away the most powerful piece of technology at an advisor’s disposal,” Pace says. In fact, advisors using aggregation tools grow about 36% faster than other advisors, he says. That’s because they save significant time by cutting out manual paperwork and they have the ability to manage all of a client’s needs.
Consolidated data is a hot commodity for financial advisors. In 2018, three-quarters of asset managers reported employing dedicated data analytics staff, according to a survey by Cerulli Associates. And the amount of data available to financial advisors is growing at the staggering rate of 4300% annually, according to a
In December, ETrade launched a
Since the fourth quarter, New-York based E-Trade secured more than $12 billion in commitments to its RIA platform and added more than $2 billion in net assets under custody, according to company data. Technology was at the heart of those efforts, Pace says.
“If an advisor does not provide a high level of functionality to the end consumer, someone else will.”
Here’s what Pace has to say about the growing independent advisory channel, the need for robo advisors and the possibility that tech giants like Amazon or Google are eyeing a spot in wealth management.
What has been driving growth in the RIA channel?
The pricing landscape has stabilized. For a while, price compression was at a significant level for advisors and the debate was whether or not robo advisors were going to come eat their lunch — if RIAs would become the modern-day equivalent of travel agents. The advisor has figured out that the holistic concept really rings true and that they can deliver greater value sets for the end user. Not only holistic wealth management but delivering it with a personal touch. That has allowed advisors to really grow. The price point stabilized and advisors have learned to add more value underneath and from that we have a ringside seat to some explosive growth stories.
Also, the marketplace has prevailing tailwinds. For example, a 10-year bull run and the staggering amount of wealth that has been created for investors. Enormous market size has grown exponentially. For advisors who figure out how to dial up their value proposition, there’s a lot of open field to run.
How will robo advisors perform in a down market?
The advent of the robo has occurred in a bull market and how long the market runs remains to be seen. Truthfully, robos will always have a relevant place in the financial services industry. At the end of the day, consumers want choice. Some folks want a prepackaged solution and don’t want to talk to a human and are 100% comfortable with that. It’s just a differentiated offering. Like walking into a car dealership and buying an itty bitty car with great gas mileage or an SUV. Robos have fulfilled a real need for consumers.
What’s not happening is that every dollar invested by younger generations is going digital. The growth has slowed, particularly in non-Vanguard type robos. Clients might be fine with a digital platform when you have $50,000, but it’s not exactly the same when you have $5 million.
What is the most important tech tool in the advisor’s toolkit?
It’s the ability for an advisor to leverage a CRM and from that initial entrance of data be able to flow the data all the way through to an account opening at the custodian. That level of automation becomes really critical — end-to-end of an account opening without touching paper — especially for advisors that are growing quickly. Otherwise advisors will have to do everything manually and that is slow and fraught with errors.
It’s like buying something on Amazon. The consumer can’t complete the check out with the wrong credit card information because the system will keep kicking it back until the consumer gets it right. With end-to-end technology, the client can’t hand in paperwork that is incomplete or with incorrect information that is an incredible waste of time for advisors. Those types of integrations are legitimately seamless and super rare.
Will technology firms like Amazon enter the wealth management space?
Do I think it’s possible? Yes, I do. Especially the firms where the bulk of their business is domestic. Financial services are very parochial around country boundaries. Amazon revenue streams are mostly garnered domestically. Netflix is in that boat as well. Facebook is mostly driven around a global presence. I think on a certain level any of those firms would have a degree of success. But I don’t see it as a threat. The reality is that they’re not going to build their own custodial platform. They’re not going to become a bank. I’d be more inclined to think about it as a huge potential opportunity.
What are some of the dangers for RIAs?
The competition is really pretty intense. Advisors need to be wary about who they partner with and maintain a drive to stay current. There are new versions of RIAs popping up every day. Personal Capital amassed $5 billion and those assets came from somewhere. At the same time, advisors have to serve their clients, talk about their well-being and plans for the future. How do you juggle that many balls at once?
To start, advisors should be really wise when choosing a partner, so you don’t end up in bed with what could be the enemy.
