Will Robo Advisors Kill The Financial Services Industry?
By: Roger Nusbaum, AdvisorShares ETF Strategist
The job of being a financial advisor is evolving both as a function of available technology and the financial realities that may confront Generation X and the Millennials.
Younger people (younger investors) are of course generally more comfortable with technology than older people and the entire automated advice industry is being built around this truism as well as the difficulty of “beating” the market. The fees are tiny for portfolio management but in a recent interview Wealthfront CEO Adam Nash said the better comparison was software subscriptions, he said the average $200 they make in revenue from each of their clients is a big number in the software context.
If you do a little research on the so called robo advisors you might conclude there is no money to be made in this business to which I would add the word yet. Complete dismissal of the idea is essentially a bet against technology and innovation and robo advisors don’t need to be wildly profitable to be competition for new clients for your practice.
The threat that Generation X and the Millennials are going to be financially worse off than their parents is also a threat to the traditional financial services industry; new prospective clients will have smaller accounts which means less revenue. There is no way to know absolutely whether this generational effect will play out but with jobs harder to come by and younger people having larger debt burdens after college it seems plausible and advisors should be paying attention to this and figuring out a strategy to overcome these threats. Relying on wealth transference may not be a good idea either as more and more boomers are likely to struggle with their retirements.
Over the weekend I found this article about “retirement coaches” who help people with various aspects of retirement, not just financial in fact some don’t even address planning issues. There is of course some form of fee for this service and while the comments on the article were plenty skeptical I can see this sort of thing as being a part of the value proposition that advisors will offer more overtly.
Coaching in the context of the above linked article includes coping with the psychological aspect of retirement, helping clients figure out what to do with their time, helping them figure out how to incorporate some sort of work (if needed or desired) into the mix and a few other things. This sort of help may be in the wheelhouse of some advisors already but if it becomes difficult compete with robo advisors on investment results then services like coaching may not be new revenue sources but can be differentiators for people considering automated advice.
Circling back, if Generation X and the Millennials are going to have less accumulated than their parents then an advisor faces the prospect of having to have more you don’t have enough money conversations to which a client might respond; so what do we do? Obviously an advisor who wants to sustain and grow his practice needs to be ready for a comprehensive conversation that helps the client get to a real solution.
An actively engaged do-it-yourselfer reading this may think people should not use advisors, questioning the value they add. The question is always valid but the reality is that very few people spend time reading, learning and studying markets, investing and retirement as the typical blog reader or Seeking Alpha reader. One conversation that emerged from the financial crisis was the lack of financial literacy by many Americans. Despite what happened in the crisis, anecdotally there not much has changed. I talk to a lot of people socially who are not meaningfully engaged in their retirement planning.
A point I have made along these lines before is that you, the engaged do-it-yourselfer are probably the go to person in your family, among your friends or other circles of influence for markets, investing and retirement questions so this is relevant for you.