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LIMRA INSIGHTS

How To Get Robo-Advisors to Work For You


By offering a robo-advisor platform, traditional advisors can expand their business and add sales capacity to their practice.

Like it or not, robo-advisors are here to stay. As they evolve, robo-advisors are shifting from retail to institutional use. Giants such as BlackRock, Fidelity, Schwab and Vanguard are building or adopting their own robo-advisory offerings. “Practice management” is largely cited as the reason why these firms are introducing a robo-advisor platform to help their distribution partners improve their practices by expanding their respective markets.

LIMRA research has found that robo-advisors currently represent more of a threat to “self-directed” investment models than they do to the “traditional” financial advisor model. But this is changing. Today’s younger, more sophisticated investors who are attracted to the robo-
advisor alternative are tomorrow’s clients. As a result, the financial advisor business model will evolve to keep pace, and forward-thinking advisors will look to include technology-driven alternatives in their practices.

In 2012, online investment advice firms (which include firms in the retail and institutional markets) managed $118 billion in client assets. This number is expected to reach $655 billion by 2019, according to Tiburon Research. Although growth in online investment advice is predicted to be strong, the total assets robos hold under management are relatively small. To put this into perspective, the 500 largest asset managers in the world held $78 trillion in total assets under management at year-end 2014. Assets under management for North American firms equaled $45 trillion, according to Towers Watson research.

The expected growth for robo-advisors over the next few years represents opportunity, especially with the evolution of robos’ capabilities. The algorithms used to determine the investment mix are advancing, and some robo-advisor firms have unveiled more sophisticated investment strategies with expanded investment options. There are robo-platforms that claim to protect clients against severe market downturns. The algorithms are designed to monitor the hedging strategies of institutional money managers in order to provide downside protection.

For example, if equity markets are expected to be under pressure, then assets are allocated to U.S. government bond indexed exchange traded funds. Conversely, if strong market performance is anticipated, then portfolios will be weighted toward equity indexed ETFs.

Robo-advisor firms are looking into more actively managed investment strategies instead of the “typical” passive investing approach. In addition, robo-advisor firms are providing a wider array of investment options at no additional cost, including bitcoin, commodities, private equity and real estate.

Right now, robo-advisors are focused solely on investment management. Consequently, financial professionals who concentrate on life insurance, or create tailored investment plans for clients, may not benefit from the solutions currently available through robo-advice. But, to succeed, financial advisors will need to provide more value-added services to become more holistic and offer more than investment and insurance management.

By offering a robo-advisor platform, traditional advisors can expand their business and add sales capacity to their practice. Advisors also can develop relationships with existing clients’ families as older generations transfer wealth to younger generations. This would create the opportunity to introduce young investors to the advisor’s robo-platform, then keep them as clients as their investments grow and require the advisor’s counsel.

Given their level of acceleration, robo-advisor tools will become pervasive rather quickly. As firms build their own robos, acquire the technology or partner with robo-advisor firms, the automated solution will become part of the toolset that many firms provide.

From the financial advisor’s perspective, it is going to weed out those who are doing only what a robo-advisor can do.  Advisors who work with robos can bring more focus on relationships.

With the proper integration, robo-advisors will allow traditional advisors to spend more of their time and effort engaging with clients and serving their broader planning needs, strengthening client relationships, and knowing the client as a person. These are things that a robo-advisor cannot do. 

Konrad Wisniewski is a research analyst for LIMRA’s distribution and technology research arm. Konrad may be contacted at [email protected].

 

Konrad Wisniewski is a research analyst for LIMRA’s distribution and technology research arm, which supports investment-focused distribution research including financial institutions, full-service and independent broker/dealers, and registered investment advisors. Konrad may be contacted at [email protected] .