EMBRACING CHANGE AS OPPORTUNITY - Harness the Power of the "Robo-advisor" in Your Practice
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ssga.com | spdrs.com EMBRACING CHANGE AS OPPORTUNITY Harness the Power of the “Robo-advisor” in Your Practice
Key
Takeaways
Advisory firms and their investment Investors are seeking greater value from
professionals may need to embrace new their financial advisors along with a clearer
technologies in order to meet clients on understanding of services provided. The
their terms. But embracing technology role of advisor planning platforms and
does not mean replacing human advisors. their ability to streamline the goals-based
process cannot be underestimated.
Robo-advisors are widely expected to Combining the human touch of an
continue gaining market share among experienced financial advisor with the
investors with accounts below $100,000, logic, fee transparency, methodology
may potentially make inroads among and accessibility offered by robo-advisor
investors with accounts between $100,000 platform can be a powerful combination
and $500,000. for an advisor’s practice model.
2The overriding challenge for advisors today is that they
often need to meet the distinct needs of two different
types of clients. Older clients are increasingly focused on
retirement solutions and the best way to pass their legacy
on to the next generation. Meanwhile, that next generation
is looking for “adaption and innovation” from its advisors,
including access to the latest technology, innovative
products and client-customized solutions.
State Street Global Advisors | Channel Name Goes Here 3Embracing Change as Opportunity: Harness the Power of the “Robo-advisor” in Your Practice
“Robo-Advisors,” the web-based, low-cost
investment management services making headlines
in recent months, have quickly become one of the
fastest-growing players in the retail investment
world. Their disruptive innovation has put some
“human” players in investment advisory business
on the defensive.
Still, while traditional full-service providers should be taking Still, while each generation has a slightly different approach
note of this accelerating growth, the robo-advisor phenomenon to investing, financial planning and working with financial
can also be viewed in a positive light, says Kevin Quigg, advisors, there is also plenty of common ground among them.
Managing Director, State Street Global Advisors, Global Head of In 2014, State Street’s Center for Applied Research asked
ETF Sales Strategy. “Advisors can incorporate some of the same investors: “In the future, do you think that technological
robo elements that have driven that sector’s growth into their advances in providing financial advice will better serve
own business models, including algorithm-based management individuals with regard to value and cost than financial
of model ETF portfolios,” he says. “In doing so, advisors can advisors?” It found that more than three-fourths (76%) of
leverage efficiencies while enhancing the value of the personal Millennials respondents checked “yes,” and that even a slim
guidance they can deliver.” majority of boomers (54%) took the same view. Gen X
respondents came in right between the two, with 67%
agreeing with the idea.1
An Industry in Transition
The rapid rise of robo-advisors is just one piece of a larger trend
that is reshaping the advisory industry, driven in large part by Figure 1: By the Numbers
an ongoing generational shift. As Baby Boomers (ages 49-67) How different generations want to engage with their advisors
age, they are moving from the asset accumulation to the
distribution phase of their lives. Coming up behind them are
Gen X (ages 33 to 48) and Millennials (ages 18 to 32), who are “I prefer working face-to-face or over the
in the middle or early part of the accumulation stage. phone when making investments”
The overriding challenge for advisors today is that they often
need to meet the distinct needs of two different types of
54 %
clients. Older clients are increasingly focused on retirement
solutions and the best way to pass their legacy on to the next
generation. Meanwhile, that next generation is looking for
“adaption and innovation” from its advisors, including access
to the latest technology, innovative products and client-
50 % 49 %
customized solutions.
Millennials Gen X Baby Boomer
Source: State Street Center for Applied Research Survey Analysis 2014; Question
asked: What is your preferred communication mode? (I prefer to use remote or online
channels for making investments/I prefer working face to face or over the phone
when making investments) n=2,880 individual investors.
4TALKING TO YOUR
CLIENTS ABOUT FEES
For many clients and prospects, an attractive element of robo-
advisor platforms is cost (albeit not a trump card). If an investor
believes he or she can get the same quality of service for one-fourth
or less of the price currently paid to a human advisor, the decision
isn’t complicated. But our recent study2 reveals that only 33% of
investors say they “completely understand” the fees they are being
charged. And even when they know how much they are paying, they
don’t know if it’s reasonable—particularly if they don’t understand
the value they are receiving.
Most clients are value-conscious, says Joshua M. Brown, a There is no right or wrong fee structure. “It’s all about how
New York City-based financial advisor at Ritholtz Wealth advisors operate within their fee structure,” says Michael
Management, but they don’t always know what that means. Stevens, Managing Director, SSGA Intermediary Business
Often investors are more focused on beating an investment Group. The following are best practices that can help your
performance benchmark than achieving long-term goals. clients appreciate the value of your services and be less tempted
“Portfolios are now free—valueless,” Brown says. “Advice, on by the allure of low-cost robo platforms.
the other hand, is invaluable—but only if it’s delivered with
Assess clients’ financial literacy. A high level of education
meaning and when it counts. This is the challenge. This is how
is not an indicator of financial literacy. Communication about fees
advisor fees are either earned or not.”
should begin after you gain a sense of the client’s understanding
So it’s up to the advisor to explain the value clients are of investing and how the financial-services industry works. This
receiving for their fees. State Street Global Advisors (SSGA)‘s helps you know where to begin the discussion and what
research on the topic of communicating value and discussing to emphasize.
fees shows that when clients understand what they’re paying for
Be upfront, consistent and concise. Take the lead and
and the value they are receiving in return, they are significantly
address your fee-value proposition before your client asks.
more likely to agree with these statements:
Keep it simple by spelling out and personalizing the services
• The fees/commissions my advisor charges are fair. that matter most. Stress the collaborative nature of the work
• My financial advisor provides objective advice without you will do with the client.
regard to the fees or commissions I pay. Ensure comprehension. After explaining your compensation
• Based on my recommendation, a friend or family member structure, ask questions intended to reveal if they understand
has become a client of my financial advisor. what you've explained.
State Street Global AdvisorsState
| Channel
StreetName
GlobalGoes
Advisors
Here 5Embracing Change as Opportunity: Harness the Power of the “Robo-advisor” in Your Practice
Studies also show a direct correlation between age and current Figure 2: Percentage of Investors Who Consider the
utilization of particular services offered by online financial Following Criteria Important When Selecting a
providers. For example, about one-fourth of investors under the Financial Advisor
age of 40 use web-based “advice” features, in contrast to just
13% of respondents in their 50s and 12% of those in their 60s.3 Is upfront with me and represents
The good news for advisors is that while younger investors are situations truthfully 97%
comfortable using technology and want to play an active role in
their financial affairs, that doesn’t mean they don’t want human
interaction (see Figure 1). “What we learned about Millennials
Understands my financial needs and goals 96%
might be surprising to some people, but it shows that many of
them want to connect with advisors on a personal level,” says
Brie Williams, Head of Practice Management at SSGA. “That
Acts and performs consistently 95%
represents a huge opportunity.”
Another factor working in favor of traditional advisors:
Has a high level of integrity 95%
Investors overwhelmingly place a higher value on advice when
a person is involved, according to a 2014 Cerulli report.4 Has my best interests at heart 95%
The Move to Passive
Rounding out this dynamic environment is the rapid rise of
Welcomes open and honest communication 95%
passive exchange-traded funds (ETFs). Investors still grappling
with residual trauma and cynicism from the 2007-2009
financial crisis are looking for the simplicity and transparency
Follows through on goals and promises 91%
that ETFs deliver. At the same time, traditional advisors are
increasingly drawn to the flexibility and low costs of ETFs when Works for a reputable firm 90%
building client portfolios.5 “This is a secular shift to passive
management, not a cyclical one,” says Suzanne Duncan, Global
Head of Research for State Street’s Center for Applied Research.
Keeps me informed on a regular
basis about investment products 89%
This shift, though, is fueling the emerging investor perception
Is knowledgeable about new,
that basic asset management is a “commodity” service, not a
source of added value worthy of the significantly higher fee
innovative investment products 89%
charged by traditional advisors. “Investors are more price-
sensitive now because they have been burned too many times,”
says Michael Stevens, Managing Director, State Street Global
Is a top performer 84%
Advisors (SSGA) Intermediary Business Group.
So for traditional advisors to differentiate their value
Charges low fees and/or commissions 76%
proposition from that of robo-advisors, they need to rethink not
only the services they offer, but also how they charge for them
and how they communicate their value to clients. The role of
Is highly recommended by a family member, friend or colleague 61%
advisor planning platforms and their ability to streamline the
goals-based process cannot be underestimated. Source: State Street Global Advisors’ Quantitative Survey “Financial Advisors’ Value
Proposition and Compensation,” August 2014. Question asked: How important is each
of the following to you when you are selecting an advisor? Percentages represent
respondents ranking the variable in their top two factors on a five-tier scale.
6The True Value of Financial Advice
It is true that the low-fee structure of robo-advisor services can WHAT DO FULL-SERVICE
be attractive, particularly to younger investors who are only
now getting serious about investing and are just beginning to
accumulate wealth. They provide a cost-efficient way to begin
ROBO PLATFORMS OFFER?
building a diversified portfolio.
Common Services and Fees
for Robust Robo Services
Cerulli research6, for example, found unanimous agreement
among traditional investment firms that robo-advisors will Establishing Goals
continue to gain market share among investors with accounts Can distinguish between retirement
below $100,000. However, fewer firms in that survey expect and other objectives
market share gains by robo-advisors for accounts in the
Risk-tolerance Determination
$100,000 to $500,000 range, and only a minority of the firms
Based on age, goals and responses
polled anticipate robo-advisor market share gains among clients
to investment style questions
with more than $500,000. Of course, cost is not always the
primary variable in investor decision-making. Asset-allocation Establishment
Determined by goals and risk
In fact, as Figure 2 illustrates, “charging low fees and
tolerance assessment
commissions” ranks 12th on a list of 13 factors investors
weigh when picking an advisor. Still, complexity around Asset Management
advisory fees can become a source of friction or even Generally model-driven with high
dissatisfaction when clients are unclear about what they are concentration of passive ETFs
paying for, how the amount is determined and the value they
are receiving for the price. Portfolio Rebalancing
Automatic — Some can improve
tax-efficiency by applying new funds
“Investors are seeking greater value from their to underweighted sectors rather than
financial advisors along with a clearer understanding selling assets in overweight sectors,
of services provided,” Williams says. which could trigger capital gains taxes
Qualified Retirement-plan Vehicles
So it is critical for clients to understand—and value—the broader Generally available
services that advisors can deliver when they address their
clients’ financial needs holistically. John C. Christianson, CEO Tax-loss Harvesting
of Highland Private Wealth Management, sees a wide gap—and Automated generation of tax loss by
thus a big opportunity—between the pure robo-advisor market selling appropriate shares then
and the traditional assets-under-management (AUM) fee-based repurchasing others with similar
business model that most advisors follow. investment attributes
Christianson combines a foundation of low-cost, ETF-based Investment-performance Analysis
portfolio management with high-touch services that allow Time-weighted asset return calculations
him to customize comprehensive financial planning strategies and overall account growth percentages
for each client at a level a computer could never match. For for each distinct goal-based account
example, robo-advisors automatically rebalance portfolios to
Account Funding
maintain the fixed-allocation model (see side-bar). What they
Automated transfers from bank accounts
cannot do, however, is exercise nuanced judgment about the
timing of the rebalancing and decide which positions to Fees
liquidate in the process. And most can’t take into Vary — Some have a flat percentage
consideration the role that assets outside the portfolio might of asset structure (e.g., .25% or .30%),
play in designing an asset allocation. others use a sliding scale with fees
ranging between .35% and .15%
State Street Global Advisors 7Embracing Change as Opportunity: Harness the Power of the “Robo-advisor” in Your Practice
While some robo-advisors can perform tax-loss harvesting, The Advisor Advantage
they cannot take into account other facets of a client’s
Advisors intuitively understand the value they bring to the
financial picture beyond the portfolio they are “managing.”
table. Going forward, though, they are going to have to do a
For example, a client may have ramped up charitable giving,
better job of quantifying that value-add to clients. One way
sold a home or taken another significant step that might play
this can be accomplished is by identifying and assessing key
into the client’s tax situation.
facets of the service, particularly those that can only be
delivered by a human being.
The most important difference Morningstar Investment Management studied the topic and
between a person and computer came up with a formula for what it calls Gamma, “the additional
value that can be achieved by an individual investor [typically
algorithms, though, might be the when guided by a financial professional] from making more
“emotional governor” advisors use intelligent financial planning decisions.” In their study
published in 20137, researchers David Blanchett and Paul
to keep their clients from making Kaplan pinpointed five variables that impact portfolio
investment decisions based on performance, using retirement income as the metric:
excessive fear or irrational • A total wealth framework • The role of guaranteed
to determine the optimal income products
exuberance. Their experience asset allocation • Tax-efficient decisions
guiding clients through a variety • A dynamic • Liability-relative asset-
of market conditions or helping withdrawal strategy allocation optimization
them make important decisions
after an emotionally paralyzing “Using Monte Carlo simulation, we estimate
event in their life cannot be a retiree can expect to generate 22.6% more
in certainty-equivalent income using a
duplicated by a robo-advisor. Gamma-efficient retirement-income strategy
when compared to our base scenario,” the
One approach some advisors take is to charge a flat annual authors concluded.
retainer for their services. This places the emphasis on the
high value of the consultative dimension of the service—that
which is lacking in a pure robo-advisor model. Charging The challenge, however, will be providing the added value on an
retainer fees, though, requires assessing and then conveying affordable basis as robo-advisors and other technologies continue
to clients both the complexity of their needs and the resources to put pressure on fees. For many advisors, the answer will be
that will be brought to bear to address them. Those needs are found in deploying robo-like, labor-saving technology solutions,
not necessarily correlated to the size of the client’s portfolio, freeing them up to spend more time working with clients while
which means fees for large but low-maintenance accounts simultaneously cutting overhead costs.
might be lower than those for smaller accounts requiring
more time and attention.
8Case Study
MEET THE BIONIC ADVISOR
For industry pioneer and entrepreneur AdvicePeriod represents the next Fortigent, founded by Lockshin and now
Steve Lockshin, combining the two generation of advisory firms—“bionic owned by LPL, is one of a growing
business models meant starting from advisors”—that combine robo-type asset number of Turnkey Asset Manager
scratch. The former CEO and chairman management services with significant Providers (TAMPs) targeting the advisor
of Convergent Wealth Advisors launched human interaction on strategic issues, market by offering private-label
a new registered investment advisory including estate planning, where robo platforms that advisors can incorporate
(RIA) firm, AdvicePeriod, in 2014. The systems currently do not compete. into their business. Betterment, which
firm was founded on the premise that AdvicePeriod outsources some of its started out exclusively serving retail
while basic money management can be services to two firms, Fortigent and investors, launched an institutional
offered and priced as a commodity, Betterment, depending on the division in 2014, which also includes a
clients with significant assets can still complexity of the account and different broker-dealer entity.
benefit from more sophisticated client needs.
investment services.
An Intermediate Approach Combining the human touch of traditional financial advisors
with the logic, fee transparency, methodology and accessibility
Advisors who aren’t quite ready to reinvent themselves entirely
offered by robo-advisors is a powerful combination for advisors.
as bionic advisors can instead incorporate robo services through
Clients can access their portfolios and much of the advice they
a process of thoughtful client segmentation based on clients’
may need online, but they can still receive the hand-holding
unique behaviors and attitudes.
and personal advice they need from a human being. This can
make all the difference as situations evolve and market
“Ensuring that client relationships are built on fee corrections occur.
transparency and a rock-solid foundation of trust 1
State Street Center for Applied Research Survey Analysis 2014; Question asked: In the future,
is more essential now than ever,” Stevens says. do you think that technological advancements in providing financial advice will better serve
individuals with regards to value and cost than financial advisors? n=1,698 individual investors.
“Transitioning smoothly through this period of 2
State Street Global Advisors Quantitative Survey “Financial Advisors’ Value Proposition and
disruption will not be possible without it.” Compensation,” August 2014.
3
Cerulli Associates, U.S. Retail Investor Advice Relationships 2014: Evolving Roles in
Client Relationships
4
Cerulli Associates, U.S. Retail Investor Products and Platforms 2014: Matching Product and
Distribution Strategy to Client Demands
5
SSGA’s “Partnering with ETF Strategists” report, September 2014; Investment Company
Institute; Morningstar.
6
Cerulli Associates, Managed Accounts 2014: Confronting Threats
7
“Alpha, Beta, and Now…Gamma,” The Journal of Retirement, Fall 2013, Vol. 1,
No. 2: pp. 29–45
State Street Global Advisors 9Embracing Change as Opportunity: Harness the Power of the “Robo-advisor” in Your Practice
NOW IT’S YOUR TURN
Instead of viewing robo-advisor platforms as the competition,
advisors should focus on the opportunities they present. First,
adding the new technology to your service menu can help you
more fully articulate your value proposition to clients and
prospects. Second, these platforms can add efficiency to your
practice, increasing your profitability and, possibly even more
importantly, helping you economically serve clients who may
have limited assets today but over time will have more dollars
and more complex planning needs.
To determine whether adding a robo
platform is right for your practice:
1 4
Talk to your custodian and other service Analyze the demographics of your book and
partners to find out how you can leverage determine how many of your clients, especially
their technology solutions to build scale younger clients, would have a high level of
into your business. comfort with self-service technology solutions.
2 5
Critique your service package and the Examine the efficiency of your operational
competiveness of your fee structure processes and explore technology solutions that
relative to the services you provide. could bring operating costs down.
3 6
Using a survey or through individual Consider the impact, both in terms of how you
conversations, gauge your clients’ spend your time and its potential benefits to
understanding of what they are paying average clients, of deploying robo asset
for your services and the actual services management tools.
they are receiving.
10State Street Global Advisors | Channel Name Goes Here 11
ssga.com | spdrs.com
For public use. security. It does not take into account any investor’s particular investment objectives,
strategies, tax status or investment horizon. You should consult your tax and
State Street Global Advisors One Lincoln Street, Boston, MA 02111-2900. financial advisor.
T: +1 617 664 7727.
All material has been obtained from sources believed to be reliable. There is no
The views expressed in this material are the views of Brie Williams through the representation or warranty as to the accuracy of the information and State Street
period ended April 30, 2015 and are subject to change based on market and other shall have no liability for decisions based on such information.
conditions. This document contains certain statements that may be deemed forward-
Investing involves risk including the risk of loss of principal.
looking statements. Please note that any such statements are not guarantees of any
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The information provided does not constitute investment advice and it should not be Past performance is not guarantee of future results.
relied on as such. It should not be considered a solicitation to buy or an offer to sell a
© 2015 State Street Corporation. All Rights Reserved.
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