To Compete with Robo Advisors You Better Get a Clue
It’s not by accident that there are so many articles in our trade journals on Robo advisor platforms. They are coming and advisors who don’t know how to deal with them are going to feel the pain of losing clients to these platforms.
Here are just a few articles that recently came out:
–Schwab ‘Robo Advisor’ More Than Doubled Assets Over the Last Year
–BofA Merrill Unveils Robo Advisor
–Robo Advisers are Here to Stay, but Some Human Advisers May Not Be
Why worry about Robo advisor platforms? One of the above articles says that many consumers think professional money management is worth only 25 basis points. The article further points out that online advice has grown 1500% since 2007 (digital platform had $16 billion in 2007 and now have $250 billion in assets).
Old vs. New–older clients are less likely to consider using an online platform but HENRYs (High Earner, Not Rich Yet) are more than twice as likely to consider using an online platform. The point being that the trend over time is to use low fee/computer based investing platforms. Online platforms are cheap and the perceived value of a financial planner has been diminished to the point where consumers think they can get as good or better results from a Robo platform vs. individual advice from a financial planner (that may be true of the typical advisor).
If financial planners don’t get a clue, they will continue to lose market share with the bi-product being, in my opinion, that thousands will be forced out of the business.
How do you combat the rise of the evil Robo platform?
I think the answer is pretty simple. Give value a consumer can’t get with a Robo platform. This race to the bottom with lower fees has got to stop. The way to stop it and the way to keep clients away from Robo platforms is to actually show them value for what you do.
In my opinion, advisors who are offering the tried and true “asset allocated portfolio” are in big trouble. How hard is it for a computer to put together a smart asset allocated platform that rebalances itself in a way that a consumer will find appealing? Not hard at all. If so, then why would a consumer pay 1.5%+ in total fees to use an advisor when they could pay less than 50 basis points in fees and get a smart computer model?
Tactical Money Management
In my opinion, the savior for a local financial planner is the use of tactically managed strategies, that are opportunistic in good times and defensive in bad times to help keep clients out of harm’s way.
Think about it, during the last stock market crash (highs of 2007 to the lows of 2009), the typical asset allocated portfolio (60% MSCI ACWI / 40% Citi World Govt. Bond) lost 35% of its value.
Using my personal benchmarks for low risk tactical money managers, they should have as
their goal to lose no more than 5-10% of their value (that includes during times like the 2007-2009 crash where the S&P 500 lost more than 50% of its value).
The magic question
All that an advisor needs to ask their current and potential clients is the following question: Would you rather use a low fee computer which arguably has a 35% or more drawdown risk going back to the last crash, or higher fee humans if your drawdown risk is 5-10%?
With some further explanation and a discussion about the benefits of tactical money management, advisors can win the war against Robo platforms.
Huge Caveat-most advisors do not have access to 10 different tactically managed strategies with audited track records going back to the last stock market crash. Most advisors are still peddling an asset allocated platform. Good luck with that.
If you would like to learn more about the different tactically managed strategies offered by POM Planning, simply click on the following link:
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