Thread: Finance blogger wisdom: peak robo-advisor?

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  1. #1

    Default Finance blogger wisdom: peak robo-advisor?

    Abnormal Returns is on a bit of a respite this week. That does not mean that we are content-free. As we have done in previous years we asked a panel of highly respected independent finance bloggers a series of (hopefully) provocative questions. Below you can see the blogger’s name, blog name and Twitter/StockTwits handle. We hope you enjoy these posts as much as we do. Feel free to jump in the comments with your own answers to the questions.
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    I have difficulty getting away from a model including a high level of individual service. That said, younger investors who are just building their assets deserve help. I certainly do not see this as the primary way to manage client accounts.
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    Venture capital has likely dried up for stand-alone robo-advisors. If so, where does the business of rob-advising go? Or said another way is robo-advising simply going to be the way advisors manage client accounts going forward?
    Ultimately, the robo-advisor technology “disruption” trend is playing out in a remarkably similar manner to the great technology “disruptions” of the past, which also never actually disrupted advisors. In the 1970s and 1980s it was the rise of technology scaling discount brokerage that was going to put stockbrokers out of business. Instead, they simply moved on to sell mutual funds instead. Then in the late 1990s the online trading platforms that provided consumers direct access to mutual funds were going to put financial advisors out of business. Instead, they simply moved on to help with holistic asset-allocated portfolios instead. Now once again, technology is predicted to put financial advisors out of business, and instead it’s simply commoditizing the asset allocation component of the portfolio, and advisors are moving on to financial planning and wealth management.
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    Notably, at each of these technology inflection points, there is an “old” way of doing business that is left behind, and a new one that is born. At each transition, the financial advisors who emerge from the other end are forced to step up the value they provide to clients, which knocks the lowest quality advisors out of the industry altogether, and allows the best advisors to build even bigger, better businesses than ever seen before.

    And so once again, the robo-advisor trend appears to be playing out in the exact same manner. Ultimately, the technology is a benefit for both consumers and advisors, whether it’s lower stock trading costs from discount brokerage, the capabilities of websites to facilitate trading and portfolio management, or software to helps to manage model portfolios and automate their implementation and rebalancing (a la “robo”). But technology doesn’t kill advisors, it augments them instead. And makes the best advisors bigger, better, strong, and delivering more value to consumers than ever before.
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    First, we have always said that they business of robo-advisors will be dominated by the custodians like Vanguard and Schwab, and that has turned out to be the case. They have a built in cost advantage in that they manage their own funds. So, they can either offer a portfolio for free (Schwab), or financial planning for a low cost (Vanguard, 0.3%). This doesn’t mean that there isn’t room for 10, or even 20 successful hybrid or robo-advisors, it just means that they need to scale for the business massively to be profitable at a low fee level, or, they need to keep headcount low and have a low cost of client acquisition, or be high fee and offer a lot of value to someone. The 20th biggest ETF manager still manages over $3 billion in assets so we think there is plenty of room for numerous players. Most investment managers and advisors will roll out a digital RIA offering of some form in the next three years.

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