Many advisors are finding that robo advisors and internet technology are disrupting the investment industry but technology can also be used to strengthen client relationships and help make better decisions. It is important that traditional advisors know that robo advisors have their weaknesses and the appropriate use of existing technology can help with finding and retaining clients.
It is true that some robos offer a compelling client interface and lower costs thanks to efficient distribution channels and lower production costs compared to traditional advisors but they don’t have a competitive edge when it comes to portfolio construction so they often lag the performance of the market. Furthermore robos can’t solve behavioral issues that clients face when setting up their accounts and how investors tend to react in a falling market.
The investment underperformance of robo advisors relative to the market is dominated by two significant factors; costs that the market does not incur and client behavior. While costs are coming down, there are still transaction costs, management fees, distribution fees and other costs. On the behavioral side, clients may overly focus on minimizing risk as a primary objective when setting up their risk profile if they are not able to discuss the long term performance risk that entails with a qualified advisor. More importantly, while the robos’ rebalancing and cost average techniques are helping investors to apply some self-discipline, it remains to be seen if they would be able to hold investors back from overruling these techniques in times of turmoil when investors often have a tendency to sell and wait for an improving outlook.
Given that clients will often still want a human to help, another problem that technology brings to the table for both advisors and clients is dealing with an overwhelming deluge of information. This is where both advisors and clients would be helped by an effective online presence. A properly designed client oriented website should focus on key moments when potential clients have the greatest need for information and insight such as when they are making a significant Asset Allocation change decision. These key moments are incurred at various new life cycle stages such as starting a family, changing careers or retiring. Therefore an effective website should involve potential clients in answering these types of questions and provide information about how you and your investment process will solve the problems they are looking to solve.
The first step in initiating an effective online presence is to find a technology partner that understands your business and can help navigate the wide variety of options in order to make the right choices. An effective web presence then needs a well thought out plan which focuses on what clients need and then constructing the technology to meet those needs. It is important that it be designed for all clients and avoids the tendency to focus on the tech oriented millennials. Clients often prefer online access for news and insights into financial market and in this respect a website works best when it gives investors not more but better information which is valuable to them.
Keep in mind that it is not necessary to take on the whole project at once. An effective technology provider will understand that and help you build your tech presence at a pace that you can work with while managing your business.
At the end of the day, robo advisors are simply taking advantage of new technology to reduce costs by bypassing intermediaries and taking client facing advisors out of the equation but they still face client behavioral issues and utilize conventional portfolio construction so they end up providing essentially the same services as older, established players. They are simply an evolution but there is still a need for client facing advisors so advisors also need to embrace new technology as the investment industry evolves.