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Can Technology Commoditize Asset Management?


Robo-Advisors are all the buzz in the world of personal finance today.  Is it possible that asset management can be commoditized?  In my opinion, no, but I do think a specific type of advisor (Advisor 1.0) is in real danger, and rightfully so.

The 1.0 Advisor has a simple asset management methodology:

  1. Give client a “suitability survey”
  2. Enter client responses into computer program
  3. Invest client in 5-6 suggested funds
  4. Rebalance account annually

For about one hour of work per year, Advisor 1.0 collects 1-2% of his client’s AUM as a fee.  Given advancements in technology and the simplicity of this model, it should come as no surprise to Advisor 1.0 that times are about to change.

Those looking for a different investment style than Advisor 1.0 in a robo-advisor will be disappointed.  The investment recommendations an investor gets from a robo-advisor would be very similar to those made by Advisor 1.0.  In both cases, algorithms select allocations based on suitability factors such as age, risk tolerance, financial stability, timeframe, etc..  Most investors would see no major difference in their allocation between these types of advisors.  The edge robo-advisors offer is not in style, but in cost.

Technology has enabled robo-advisors to build robust, scalable and user-friendly investment platforms that serve to lower both distribution and client acquisition cost.  By offering algorithm generated investment advice through an intuitive interface, robo-advisors have no need for a middle-man (Advisor 1.0) and can sell a service directly to investors.  When added up, these cost savings are passed directly to investors in the form of fees that are a fraction of what a typical investment advisor charges (0.25-0.60%).  That is a VERY attractive sales pitch.

Advisors who have been

collecting fees for basic asset allocation and rebalancing are now on their heels.  Complacency often leads to failure and in this case, many advisors are caught offsides, scrambling to reinvent themselves and scared to death of what robo-advisors are doing to their business.

There are however, a lot of other advisors out there that are much different than the typical Advisor 1.0.  Many advisors offer much more to their clients than allocation advice.  Technology can improve and solve many issues, but the value of human touch shouldn’t be underestimated.  When it comes to managing their investments, most people are going to be much more comfortable in a professional relationship with an investment advisor than an online relationship with an algorithm.  Sure, the costs may be higher, but the return an investor receives when hiring an advisor is measured in more than just dollars and cents.  You can call an advisor, talk through issues and have questions that are unique to your financial situation answered.  A good advisor should be viewed as a financial partner who can explain investments, take extra time to educate you and can put your mind at ease.

Every investor has unique needs.  Some (most) investors want a human relationship with their advisor.  For others, the cookie cutter approach offered by robo-advisors suits their needs perfectly.  Robo-advisors are keeping all of us in the advisor community on our toes.  We are being forced to justify our value to clients and better position ourselves to compete with the world of tomorrow.  I embrace the challenge and think this type of alternative to managing investments will be beneficial to good advisors in the long run.



Category: Wealth management

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