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Robo advisory has emerged as one of the hottest issues in financial services today. To gauge the impact these programs are having on RIA practices thus far, we consulted senior executives at three prominent West Coast advisory firms: Kevin Driscoll, CIO and CCO at Vickerman & Driscoll in Spokane, WA; Mark Duvall, CIO at Opes Advisors in Cupertino, CA; and Laura Tarbox, President of The Tarbox Group in Newport Beach, CA.
Laura Tarbox: I don't think of "robos" as positive or negative or temporary. I see the rise of robos as a reflection of peoples' growing preference to enact transactions online. I see robo programs as a possible solution for beginning and relatively self-directed investors.
Kevin Driscoll: I definitely don’t see robos as a fad. Technological advancements have been changing the way most businesses deliver their goods and services to customers. The investment advisory business is no different. We see these platforms as a way to offer clients another service option.
Mark Duvall: I would agree. Our target client base and our offerings have expanded with the addition of a robo advisory platform.
MD: Yes. We added Schwab’s robo advisory platform about six to eight months ago. We now have three offerings, one of which uses the program. Our first tier – which we call “Access” – uses the Schwab robo platform. And our “Select” offering has some of the same operating principles, but uses our trader and a slightly broader range of alternative investments. Then we have our full-service “Premier,” which has a significantly higher minimum investment (or annual fee), the latter two offerings do not leverage the robo platform.
LT: We have no plans to add a robo advisory program. We looked into offering a robo solution, and then realized that it would likely mean we’d have to cut back on other services. We’ve actually been moving up-market, taking on larger clients. Our target investment minimum is $5 million, and the clients we’re seeking are “delegator” clients. They want access to information but, typically, don’t want to do too much themselves. Technology is hugely important to us, but not robospace.
KD: We developed our own robo advisory platform, largely because we were seeking to expand client volume. We have a customized service offering, which we’ve branded “Buckets,” and we are currently beta testing the onboarding process. The system uses various technology solutions already developed by third parties. The custodian is TD Ameritrade; our platform provider, Orion, provides rebalancing and reporting; and another company, Riskalyze, provides the functionality behind the onboarding, including evaluation of risk tolerance and matching profiles to an investment model. We are just about ready for full release and want to make sure it’s seamless and easy for clients.
LT: We had a lot of discussion about all of the robo options – and about what it is that makes our firm unique. Our clients tend to have deeper, more complicated issues. Managing investment portfolios turns out to be one of the least resource-intensive things we do. What takes up resources is the planning and relationship management. I take part in a national study group that’s been meeting for some 20 years – including many firms managing over $1 billion. Only one is adding robo. One started robo and closed it down after one year, because they found it wasn’t getting the traction they expected.
MD: We looked at various robo advisors, including Wealthfront, Betterment and several others. We opened small accounts to test them out and did a comparative analysis across a whole group of them. Ultimately, we decided to go with Schwab. They’re our custodian, so data integration was easier. And because the investment opportunity set they offered was fairly large, we felt we could do a good job of creating a low-cost portfolio that could provide the type of diversification we were looking for.
KD: We also explored the Schwab program, but felt it inhibited our flexibility. We were looking at some fixed income options, and wanted to be able to use active managers, but Schwab was offering a lot of indexed ETFs. Our investment philosophy is that fixed income is too complex for indexing. It needs active management. My partner, Mike Vickerman, was the one spearheading this initiative for us. He devoted extensive time looking at all the technologies available. This is all so new, and we’re all learning as we go; we’ve been part of the development process. It’s been time consuming, but we wanted to be on the leading edge.
KD: Younger demographics, for sure; people who are used to using their phones for everything.
MD: The robo platform is built for self-driven people, those closer to being digital natives. But lower cost is also a factor.
KD: Yes, we’re also seeing interest from older clients, people in their 40s and 50s who are pretty sophisticated with technology, but who are also looking for options because of all the costs they’re having to deal with – putting their kids through college, saving for retirement.
LT: I think robo makes the most sense for smaller investors – those just getting started. We do work with the younger generation, too. And while most do want 24/7 access, they don’t necessarily want to be making the decisions. Like their parents, they’re busy with their careers, doing what they’re doing. They’re happy to delegate everything to us. They want the technology, but that still doesn’t mean they know what they’re doing when it comes to investing. As soon as you have some issue that has any complexity, it’s got to drive to a different level of service. We have one set of clients – a 40-ish couple, who recently sold a tech firm. They’re happy to have us do everything.
MD: I see it being valuable from two angles: (1) For those who are fee sensitive, it’s a way to lower our costs and yet provide a service that’s valuable; it’s a level of service that doesn’t need the trader or the research. This allows us to expand toward one cohort and still focus on our value add, the planning aspect. (2) We’re part of a larger financial services firm that’s mainly a mortgage bank. A lot of clients who take out a mortgage, especially if they’re buying their first home, find they may not have a lot of money left over. Or they may have changed jobs several times and have a number of 401(k)s. In some cases, they don’t have that much in assets, but they may be earning $150,000 a year, and have RSUs (restricted stock units) or stock options such that if the company does well they could become a multi-millionaire within a few years. They may not currently qualify for our "Premier" offering, but the robo offering enables us to manage smaller amounts efficiently and bridge the gap.
KD: We also have a number of clients for whom the robo program makes more sense than a full-service platform. People are becoming increasingly aware that there are these offerings out there, even though they are still in the initial stages. To the extent that we don’t need to offer a full-service package, this is a tool that can help us retain business that we might otherwise lose. As an example, we had one client recently – sophisticated, he had accumulated substantial assets, actually one of the biggest accounts we have. He let us know he was considering an automated investment platform and was considering exiting our firm. We moved him into the beta testing. We’re now satisfying his needs and he’s getting the best of both worlds.
MD: I see robos increasing the use of ETFs and index funds, and they’re lowering the perceived value of diversified portfolio management. Price pressure has come and will continue to increase on the advisory portion of the financial services business, lowering margins and increasing workloads. Asset-based fees are likely to decline over time, and may be under pressure to be replaced by fixed fee or fee-for-service structures.
LT: I think there will be increasing pressure for everyone to offer a seamless, robust, and pleasing online experience for clients. The robos are having the effect of pushing us all there a little faster. I suppose there might be some fee compression, but many of the robos are not all that cheap, and the additional cost for an advisor who offers more comprehensive service is often incremental.
KD: Clients are already accessing financial data and accounts electronically. They like the convenience of these services but there is still a need for additional support when desired or when markets are volatile. We believe a hybrid offering with email, podcasts, plus tech and advisor support is the best solution. The robo technology is just a more efficient way to leverage the service so it can be offered at a lower price point. We view it as just another services offering and it won’t displace the full-service planning and advice business.
LT: We’re not trying to be naïve. But at our firm, we differentiate ourselves – and always have – by leading with planning. It will be interesting as robos develop and perhaps offer more complex functionality, like tax planning. But I don’t really see a robo solution being able to address complex planning situations. We feel there will always be delegators, and that is the market we focus on.
MD: I think differentiated investment products that access the liquidity premium will continue to have some advantage for higher-end clients, since at this time they are not easily fit into robo advisory services. Still, with greater demand for index-based products, robo services will be important to lowering the cost of delivery to clients. Higher cost delivery mechanisms can focus on clients with sufficient assets and services to make those higher cost services worthwhile.
KD: Some advisors seem to be viewing robo as a threat. We don’t see it as a threat. We see it as an opportunity and a chance to improve productivity. We think everyone should look at it as a way to better serve their clients or expand their client base. The industry is changing, and it’s changing rapidly. If you don’t have this service, we believe it’s going to cost you business.
Kevin Driscoll Chief Investment Officer and Chief Compliance Officer Vickerman & Driscoll Financial Advisors, Inc. Spokane, WA Founded 2000 AUM: $200 million
Mark Duvall Chief Investment Officer Opes Advisors Cupertino, CA Founded 2005 AUM: $325 million
Laura Tarbox President The Tarbox Group Newport Beach, CA Founded 1985 AUM: $460 million
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