In some parts of the world like the U.S. and the U.K., robo-advisers have been around for almost a decade; in Canada, the digital addition to the financial services industry has been more recent, withh the first few robo players launching their services in late 2014.
While there is no shortage of robo companies in North America and abroad, there is still some uncertainty when it comes to how they can form meaningful partnerships with existing traditional advisers. Before we can tackle how the two can co-exist - and thrive together - it's important to understand how robo-advisers serve clients.
What is a robo-adviser, and what does it do?
Robo-advisers are typically investment managers who use technology to deliver a better and more convenient online client service. As per securities regulations, in Canada especially, a qualified and registered individual must be involved in the portfolio management aspect of a robo-adviser firm.
Generally, robo-advisers build an investment plan and corresponding portfolio specific to a client's goals; portfolios are then rebalanced on a regular basis or as required to help clients stay in line with their plans. By using technology and low-cost funds to construct portfolios, robo-advisers significantly reduce the cost of investing versus traditional investment products.
What are the benefits for traditional advisers who adopt robo-advice?
For a long time, there has been a general notion that robo-advisers are going to completely disrupt traditional advisers.
This fear is normal when technology starts to make in-roads into any industry. However, as we have seen in many other industries, the traditional players that are at risk are the ones that don’t evolve with the change or adopt newer technology for the next generation. The opposite, and more favourable, end of the spectrum is the advisers who adopt these new practices to do more for their existing clients and/or serve more clients by expanding their reach. We see this shift now beginning to take place in Canada.
There are several benefits for traditional advisers who choose to adopt robo-advice as part of their tool-kit:
- Provide a modern client experience: Robo-advisers typically offer a fully online experience for clients that includes paperless online onboarding, automated rebalancing services, and a secure online dashboard to view their balances and track their performance. Some robo-advisers offer additional tools that help track progress towards a client's financial goals. By choosing to work with a robo-advisor, traditional advisers can offer a similar experience to their clients.
- Delegate portfolio management and adminstrative tasks: Robo-advisers automate a significant portion of portfolio construction and management. It's estimated that traditional advisers typically spend 40% to 70% of their time on these tasks, which can now be freed up be delegating those functions to an automated solution. The time saved can be reallocated to serving more clients and/or deepening relationships with existing clients, focusing on areas of expertise such as financial planning, tax advice, risk management (insurance), and generally coaching clients to adopt good financial discipline to help them reach their goals.
- Minimize compliance obligations: Robo-advisers are registered with securities regulators to provide portfolio management services. To minimize their own obligations, traditional advisers can leverage a robo-adviser's registation status. For most advisory firms, compliance with securities regulations is one of the highest costs and most risky area of running a practice. Centralized management of portfolios generally reduces most of a firm's compliance risks, considering there is a more standardized and disciplined approach followed in managing client money on a robo-platform.
- Adopt a fee-based service model: Traditional advisers can offer a fee-based service through a robo-platform, which is notably beneficial for smaller client accounts. This is especially important in an environment where regulators in many parts of the world have banned, or are considering banning, embedded commissions in product fees, as we are currently seeing in Canada. Fee compression is what we will continue to see going forward, and advisers will need to integrate efficiencies within their practice to reduce operating costs.
- Position yourself for the future: As robo-advisers evolve, the industry is going to see more and more integrated platforms that incorporate tools to help with running an advisory practice, such as financial planning, client relationship management, modern ways of communication, and documentation. Some robo-advisers are already expanding into other areas of financial services such as insurance, mortgages, loans, etc., to provide a more holistic wealth management solution. And as the development of artificial intelligence evolves, we will likely see this type of technology moving mainstream in the financial advisory world. By adopting a robo-advice driven technology platform, advisory firms and their advisers can position themselves to effectively evolve with newer technologies, products, and business practices.
A robo-solution may not be appropriate for all clients. However, having access to it as part of an adviser’s tool-kit enables them to segment their client base and offer a robo-solution for those who would benefit from it. After all, research indicates that the Gen X/Y clients expect to work with advisers that provide a more modern client experience, as opposed to simply continuing to work with their parents’ advisers. Successful advisory firms of the future will be the ones that make smart use of newer technologies within their practice, while managing their regulatory obligations effectively. Robo-advisers are well positioned for this because they need to stay on top of both technology and regulations to continue developing their platform. More importantly, as securities registrants, they try the solution on themselves before offering it to traditional advisers.