roboadvisor technology

How RIA’s Can Survive the Wild West of Roboadvisor Technology – Kitces

In the 1966 spaghetti Western, The Good, The Bad and The Ugly, Clint Eastwood plays one of three gunslingers competing to find fortune in a buried cache of Confederate gold amid the violent chaos of the American Civil War. Each of the three have only partial information about the gold’s location, so they have to work together if they want to succeed.

Eastwood’s character eventually finds the gold, but it requires some innovative thinking to outsmart the other two and figure out how to end a battle between the Union and Confederate forces blocking his path to riches.

While financial advisors do not have to deal with bounty hunters or gun fights to build successful practices, they do have an ever-growing number of roboadvisors to contend with.  Advisors will not be able to outsmart the competition unless they understand roboadvisor technology and how it can be integrated into their firms. There are many obstacles in the way to success and understand where your value is and how to differentiate are the keys to success.

Understanding Advisors’ Value Added

This was illustrated during a recent webinar sponsored by Vestmark, a provider of a wealth management technology and back office services.  A poll was taken during the webinar that asked what advisors thought was their biggest value added to their clients.roboadvisor technology

The results were surprising to the main speaker, Michael Kitces, who is a partner and Director of Wealth Management at Pinnacle Advisory Group.  Managing client expectations was cited by 58% of the advisors, but this is not actually a differentiator, according to Kitces.

The ability to manage and grow your practice through client psychology is limited, Kitces explained.  Many advisor think that hand holding clients in times of stress is enough to stay competitive or to keep their assets from being raided by roboadvisors.

The pure B2C roboadvisor wave is dead.  The hybrid robo has become the norm as the industry giants like Vanguard (30 bps) and Schwab (28 bps) offer roboadvisor services combined with access to a human CFP.  Even Betterment has given in and now offers a premium plan with access to an advisor for 50 bps.

How to Respond to Disruptive Technology?

While technology is essential to running an advisory business, it’s also important to continuously adopt new technologies or else watch your margins slowly erode and eventually you will be unable to compete, Kitces warned.roboadvisor technology

There will always be inflection points in the industry where new technology will disrupt the way financial advisors run their business, Kitces observed. The question is how should advisors respond to these trends?

The key is to change your thinking from pushing back and delaying the adoption of new technology to embracing it. But this has to be done before it becomes mainstream and an obvious industry standard.  By this pioint, you will be playing catch up and will have missed out on opportunities for growth.

Only 14% of advisors attending the webinar currently have a robo strategy in place.  These are the early adopters. 66% of attendees have a some kind of plan for starting a robo strategy.  But what if they wait too long?

2017 is the year that advisors should be launching their own digital channels to get ahead of the mad rush of RIA’s that will be piling into this technology in 2018 and 2019.

By then, robo software will no longer be considered an add-on or nice-to-have but “the standard technology used to service clients,” Kitces confidently predicted.

The Wrong Intentions

The biggest benefit for RIA’s in implementing digital advice technology is in the automation of manual processes, Kitces insisted, but many advisors think otherwise.  Another poll showed a slight majority, 51%, of the webinar attendees intend to utilize their new online advice channel to try and capture new investors with smaller account sizes.
roboadvisor technology

This should set off warning bells for advisors if they were to take a look at what has transpired in the industry over the past few years, Kitces cautioned.

Slapping an “Open Account” button onto your website between the pictures of a lighthouse and the Adirondack chairs is simple, Kitces noted, but it is just a pipe dream for anyone who believes it is all that is needed to attract a stream of new assets.

Even the most successful of the crop of B2C roboadvisors, Betterment, has only $8 billion in AUM and they had to spend tens of millions on marketing to get there.  And most of those assets were gathered before Vanguard launched their own roboadvisor, which takes in more assets in a week than Betterment does in an entire year!

Since Betterment charges only 25 bps for their pure robo service, their revenue on that $8 billion is closer to what a $2 billion RIA generates. Remember, this is the most successful of the original B2C players!

Some reports have indicated that Betterment’s client acquisition costs are upwards of $500.  In order to compete, an advisor would have to spend $50,000 on digital marketing just to attract 100 new clients.  Not a very appealing return on investment.

Kitces recommended that advisors leverage digital advice technology to make their entire business operate more efficiently.  It should not be just for small accounts.  Why would you want one user experience for small clients but an inferior one for large clients?

Pinnacle Advisors has over $1.8 billion in AUM, but only needs one person to handle operations due to the efficiency of their technology infrastructure, Kitces attested.  RIA’s that plan to scale their business to new asset levels should be sure that their current solution can support it without a linear increase in resources.

Roboadvisor Technology – Just The First Step

The road to staying relevant as a financial advisor is becoming increasingly rocky.  As Michael Kitces emphasized, it is not about just being there for the client, nor is it about portfolio construction, or even financial planning.  All of these services either are or soon will be provided by roboadvisors for a lower price than you are charging.

The path to success starts with technology, but the next step for advisors is to find their niche. Specialization is the way to build a successful practice that is robo-proof, Kitces insisted.  One RIA only has retired airline pilots as clients and place advertisements in airports.  Another advisor only works with US government employees who work overseas and he gets most of his clients over the Internet.

There might even be some advisors who cater only to cowboys with fortunes denominated in gold bullion. Whatever type of client you decide to focus on, a laser-like focus is required to ensure your goal and message is not diluted. When every advisor is saying the same thing and offering the same services, differentiation and finding your own niche is the best way to ensure you’re the one riding off into the sunset.





The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at