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Thoughts on 'robo-advisors' served cold, compliments of Kitces and Waymire

With the potential for channel conflict, wirehouses are the most handcuffed in thwarting automated financial 'advice'

Sunday, June 15, 2014 – 7:40 PM by Guest Columnist Jack Waymire
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Michael Kitces: Most of the Wall Street firms will be reluctant to bypass advisors and go direct to investors.

Brooke’s Note: Please recall that only three or four years ago there was another robo-threat that had the financial advisory industry quaking in its wing tips. It was called social media. The thinking — and fear, let’s face it — went that us Luddites who knew nothing of Facebook, LinkedIn and Twitter were going to be left looking by an army of young men with little facial hair and nimble fingers. It was the attack of the killer robo-marketers on advisors wearing the cement shoes of word-of-mouth referrals. With all due respect to social media marketing, that threat no longer sends an icy cold feeling down anyone’s back. Trade publications that wedged “social media” into every headline and end-of-days fantasists alike now lose sleep another way. In confronting the robo-advice threat, advisory firm owners see entities that pay slave wages to silicon chips rather than private school tuition-level amounts to humans. Worse yet, robo-advisors are conferred with immediate trust. After all, when was the last time an ATM cheated you? Into all that thinking we place this little Q&A between Jack Waymire, founder of Paladin Research & Registry and Michael Kitces, partner and the director of research for Pinnacle Advisory Group. It has the qualities of a first-rate reality check, the abridged version. See: Online RIAs will mostly fail — and here are 10 reasons why.

Jack Waymire: First of all, do you like the “robo-advisor” name that has been coined by the media? Do you have a better name? See: Why I find the term 'robo-advisor’ objectionable and unhelpful.

Michael Kitces: I don’t love it, but it is not bad. It is a little misleading because there are no advisors. Betterment, Future Advisor, and Wealthfront prefer automated investment service. See: How one 'robo-advisor’ got $25 billion on its platform with a Mint.com mindset, 401(k) friendliness, a merger and 16 years of work.

JW: What is your definition of a robo?

MK: An automated investment or planning service that is delivered over the Internet. There is little or no human interaction with the investors who use robo- services.

JW: Who will be the primary users of robo-services?

MK: Investors who want investment advice and are comfortable letting computer programs, versus professionals, perform portfolio management functions. In general, these investors need one financial service (investing) versus multiple services (planning, investing, insurance). See: AMG makes a dramatic entry into wealth management arena, buying majority stake in $10B Veritable.

Robo with a twist

JW: Isn’t it true that many advisors already offer services that are similar to the robos.

MK: Any advisor who uses a TAMP could be called a robo with a twist — investors can meet with advisors face-to-face. What is new is the robo going direct to investors with an inexpensive, investor-friendly, online service. See: Michael Kitces becomes partner at Pinnacle, ambassador for its new TAMP-like service.

JW: What is your opinion of robos that are adding human contact?

MK: The securities markets are scary. Investors want human contact during substantial market declines. Robos cannot deliver this level of service – too expensive. See: Bill Crager: I’ve got your back against the attack of the killer robo-advisors.

Human spectrum

JW: What firm is an example of a cyborg advisor?

Personal Capital. No branch offices. Loaded with technology. Investors have access to human advisors. Delivers the same services as local RIAs and IARs. See: Why Mike Sha has a 2015 goal of $1 trillion in robo-assets for SigFig and where Marissa Mayer fits in.

JW: What levels of advisory services will investors have access to in the future?

MK: There will be three: robos that provide investment services, advisors who provide investment services, and advisors who provide comprehensive advice and services. See: Ric Edelman is looking to add a $1-billion RIA elephant even as he unveils an online consumer strategy aimed at the chipmunks.

Most vulnerable

JW: Do you think advisors will cut their fees to compete with robos?

MK: How do you explain higher fees if you deliver the same services as the robos? Advisors who recommend passive management and index funds will have a problem. Advisors who provide comprehensive services should not have an issue. See: How RIAs are becoming as complacent as wirehouses — and what it’ll take to snap out of it.

JW: Which type of advisor is most vulnerable to robos?

MK: Advisors who sell one service. See: The 10 biggest threats to the RIA business heading into 2014.


JW: Could traditional advisors be distribution channels for robo-advisors?

MK: Yes, if the advisor wants to focus on marketing and client service. See: Marty Bicknell jumps into the mass market with no 'robo-advisors’ and a missionary zeal.

JW: Do you think advisors will embrace an institutional version of robo-services?

MK: They may have some interest. Look at the number of advisors who use TAMPs. Could be a lower-cost solution. See: Why Ron Carson brought Steve Lockshin onto his team and how Betterment fits into their plans.

Impact on commission sales reps

JW: How big a threat is The Vanguard Group to start-up robos?

MK: Vanguard could put a lot of pressure on robos that provide one service. The brand name could make investors feel safer. It will be interesting to see how other no-load families that do not depend on advisors react to this service. See: Fidelity Investments soon to jack up commissions on DFA and Vanguard Group mutual fund trades.

JW: How will commission sales reps be impacted by the robos?

MK: Commission guys have been pounded by RIAs and IARs since 1975 (deregulation of commissions). Robos will make it that much tougher to make a good living. See: Why RIAs should hedge their fee income to stay aligned with client interests.

JW: If the robo model is successful, how do think Wall Street will react?

MK: They already have robo services. Look at Merrill Edge. Most of the Wall Street firms will be reluctant to bypass advisors and go direct to investors. Keeping costs down will be their biggest problem — they have too much overhead. See: The amazing success of Merrill Edge and why some legacy Merrill brokers think it’s eating their seed crop.

Betterment platform?

JW: Are you still considering the use of Betterment Institutional as the platform for your own XY Planning Network? See: The 25 financial advisors with the biggest online presences — and a frank analysis of what online omnipotence does (or not) for them.

MK: There’s no decision yet on Betterment Institutional and XY Planning Network. Betterment Institutional hasn’t fully launched their platform yet (it’s still in development), so we’re still waiting to see the actual solution. We remain upbeat about the potential, but just have to actually SEE the platform before we can confirm we’re going to use it. I believe their expectation at this point is to have their launch in the next month or two.

Michael Kitces is a partner and the director of research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.

Jack Waymire spent 28 years in the financial services industry. For 21 years he was the president of an RIA that provided investment services to more than 50,000 individual and institutional investors. He is the author of Who’s Watching Your Money? and the founder of Paladin Research & Registry that provides referral and marketing services to RIAs and IARs. You can follow him on Twitter at @PaladinRegistry, or connect with him on Google+.

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Mentioned in this article:

Portfolio Management System
Top Executive: Andy Rachleff

Paladin Digital Marketing
Consulting Firm, Marketing & Public Relations, Investor Referrals
Top Executive: Jack Waymire

Consulting Firm
Top Executive: Michael Kitces

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein

Stephen Winks

Stephen Winks

June 16, 2014 — 7:54 PM

My earlier comment was lost in transmission.

Advice as defined by statute requires continuous comprehensive counsel which means advanced technology (Robo Advice) is essential to address and manage an unlimited number of investment and administrative values for an unlimited number of clients in real time. There is no such thing as robo advice, just tools that allow advisors to manage information in a manner that transcends the three dimensional ability of humans to reason.

Robo advice should not be feared as it greatly elevates the level of counsel it is possible for advisors to render and manage. But it does render flipping high cost mutual funds as a service of little or no value.

The number of advisors who are accountable and responsible for recommendations will greatly increase while the number of brokers who are neither accountable or responsible will eventually disappear.


Marty Morua

Marty Morua

June 16, 2014 — 1:12 PM

Comprehensive Services

Two little words that stood out in this interview. That’s probably the 'key’ to what financial advisors (real ones…..humans) need to offer in order to differentiate themselves from the Automated Investment Services (Robo-Advisors). Both serve different markets and both have their own unique value propositions.

Marty Morua

Stephen Winks

Stephen Winks

June 16, 2014 — 7:43 PM

beyond human comprehension

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