The topic of robo-advisors, while having been around for some time in the US now, is becoming an area of interest to many in Canada with the launch of a few low-cost, low-touch, automated advisors. After answering a few questions and with the help of some fancy computer algorithms, these asset managers are able to quickly create an asset allocation with ETF recommendations and perhaps more importantly, a strategy which often includes regular rebalancing and tax-loss selling all at a low cost. Currently, the target market has been wealth-accumulators who may not have enough assets today to generate many advisors’ interest but should see their net worth grow materially over the years.  As passive indexing becomes all the more popular and clients become increasingly disenchanted with the notion of outperformance and generating alpha, advisors are going to find that they will have to begin tweaking their value propositions and even their service offerings in order to compete with the simple, easy-to-understand and low-cost approach offered by robo-advisors. So how can advisors protect their current clients from the robot invasion while convincing new clients to entrust them with their assets?

1.    Personal touch/Relationship building – This is likely an advisors best defense in the battle with the robots. In order to be a low cost provider, robo-advisors simply cannot build the relationships in the same way an individual can. It takes far too much time and effort, all of which cost money. An advisor has the ability to share interests and activities with the clients and truly get to know them on a deeper level. If these relationships can be developed, like in any business, it becomes increasingly difficult for both parties to go separate ways. Unfortunately, in order to increase the personal touch, it likely means that many advisors will have to cut loose some of the smaller accounts to allow them the time and resources to focus on and build the relationships of those key accounts.

2.    Value added services – Many advisors will also begin to find that clients aren’t really with them for the actual investing of the portfolios. The difficulties in outperforming when being charged fees and the stats backing it up have become well known amongst the investing public. It is simply becoming too easy and cost effective to invest on ones own and most of the value is likely to come from the additional services and strategies such as tax planning, estate planning and income splitting. In a lot of cases, these services are where the real value comes from; good returns are just the cherry on top. These value-added services are likely much easier for the large brokerages with dedicated teams to provide but the opportunity should not be ignored by smaller advisories. While having a lawyer and financial planner on the payroll may not be realistic, partnerships can be established with other boutique service type professionals where they provide basic services to one another while also referring clients if they are seen as a good fit (while hopefully disclosing the relationship!). Smaller operators could even locate offices close to one-another and come together when trying to gain new clients or retain key clients. 

3.    Finding a niche – Since low cost providers target broad asset classes and passive investments there is opportunity in addressing underserved or overlooked niches. An example could be focusing the majority of resources on constructing a portion of a portfolio such as preferred securities, convertible debt or bond ladders. Essentially, more difficult areas to gain exposure to on your own and where some unique expertise is needed. The remainder of the portfolio could be invested passively in funds with the fee being justified through the professionally managed portion of the portfolio. Serving a niche helps to differentiate the advisor and helps to get away from the problem of being a jack-of-all-trades but master of none. 

4.    Fee transparency – The industry is already headed this way with CRM2 and you have to think that there are going to be a lot of angry phone calls when clients have a down period and can clearly see the management fees outlined on their statements. Aside from trying to get ahead of the curve on these changes and avoiding a wave of phone calls on the day statement reporting has to be updated, advisors have the opportunity to speak directly to the fees they charge. With robo-advisors, the clients still do pay a fee and in some cases are getting little added value aside from the asset allocation and rebalancing. With a little bit of time and reading, many investors could do this themselves if they desire. Advisors, on the other hand have the opportunity to sit down with the client and justify the fees being charged. You can show what the client is getting, what you are doing that others cannot and what the client would have difficulty doing on their own even if they tried. The charging of fees has never really been the issue; it is what has been given in return for the fees. If you find that when you sit down you have a hard time justifying those fees, then you could be a casualty in the robot war. But fortunately there is still time to adapt and adjust.

While it is a threat to the traditional model, the robo-advisors can be beat. Those most likely at risk are the plain-vanilla type of advisors who are simply selling high-cost mutual funds with little in the way of value-added services. As a whole, this trend will make the industry all the more competitive and will make the addition of new clients more difficult. If the robo-advisors gain acceptance amongst a large amount of wealth accumulators, it will be hard to convince them to switch over once they have a larger, more attractive level of assets. This may require traditional advisors to try to beat the robo-advisors to the punch and ‘invest’ in a stable of younger investors that they expect to see assets grow over a longer time period. This could help to build a strong relationship as well as saving time and effort down the road when trying to acquire clients from lower cost service providers. It is an interesting time in the finance industry and most would agree that fundamental changes in the business are taking place. While the robo-advisors are a new phenomenon, one notion that isn’t new is that you have to adapt to the times or risk getting left behind.