Digital technology has disrupted industry after industry, changing everything from the way we travel and communicate to the way we order food.
But the financial services industry apparently hasn’t gotten the memo. Financial advisors, in particular, remain stuck in a digital Stone Age, mired in inertia and short-term thinking. But here’s a message to my colleagues in the industry: Change is coming. It’ll be good for consumers—and painful for financial advisors and others who fail to adapt.
I’m talking specifically about the robo-advisor movement. For nearly two years, the financial services industry, and the media that cover it, have been obsessed with these online investing platforms. While there’s a lot of hype, too many advisors are ignoring what the new technology really means.
Robo-advisors have already gathered more than $19 billion of assets. And some forward-looking “traditional” advisors have begun integrating them into their businesses—letting the robos handle automatable tasks such as asset allocation and security selection, as well as the more mundane operational tasks, reallocating those resources to a better client experience.
Read More Trust a robo-advisor—at age 64?
Those advisory firms have come to understand that robo-advisors can do these things just as well as they can, at lower cost. By using them, advisors can free up time to focus on value adds such as tax advice and estate planning. Moreover, computers can rebalance and tax-loss harvest far better than any human, offering enhancements that most advisors fail to provide.
But plenty of advisors have their heads in the sand. In a recent survey by consulting services firm Accenture, just 19 percent of U.S. and Canadian advisors said they see robos as a serious threat. A full 40 percent say they pose no threat at all.
The truth is that firms that don’t adapt and update their technology can expect to fall behind fast as innovation races forward. Consider that it took 75 years for the telephone to reach 50 million users. Radio got there in 38 years. Television needed 13 years to reach the 50 million mark. The Internet? Three years. And Angry Birds—only 30 days. Adoption moves lightning-quick in today’s wired world.
The money train
Worse news for backward-looking advisors is that robo-technology is poised to disrupt the compensation model that’s been so good for them for so long.
Don’t think for a minute that the financial industry doesn’t understand the potential of technology. To the contrary, financial technology is the hottest space in venture investing today, with some industry experts suggesting that 2015 will deliver $20 billion in “FinTech” investments.
Read More Advisors ‘mind-mapping’ clients
But adopting technology that will benefit their clients is a different story. To put it bluntly, financial advisors and the firms that employ them are doing their damnedest to slow the adoption of technology in the financial services industry.
Why? Because the industry’s cushy compensation model is based on obfuscation and complexity. Advisors lump together a mix of services, such as financial planning, investing and tax management. They charge either sales commissions, a set fee based on a percentage of assets under management or a confusing mix of both. Since advisors never itemize the cost of each service, clients are in the dark about the amount—or if they’re being overcharged.
This opaque model has helped the financial services industry get rich. For the last decade, the sector has comprised roughly 8 percent of U.S. gross domestic product but gobbled up between 30 percent and 40 percent of GDP profits. That’s an amazing transfer of wealth to a very small number of stakeholders.
Robos, however, are blowing away the veil of secrecy around services and fees.
Today’s consumers are learning that they can get everything from asset allocation to tax-loss harvesting, execution and consolidated reporting, all for just 15 to 25 basis points annually of their invested assets—a fraction of what human advisors charge. The robo revolution has shown that these supposedly expensive, complex services are in fact mere commodities.
An endangered species
Which brings me back to the matter of our industry’s inertia. Despite technology being the most discussed topic behind conference-room doors, most of the industry is choosing to ride the current money train as long as it can keep chugging.
That may not be long at all. The fickle, cynical consumer that will soon control our nation’s wealth will quickly choose simplicity over complexity, clarity over obfuscation. And the variety of fees that exist today will be collapsed into a transparent and unconflicted set of choices that empower the consumers.
Make no mistake: There will be survivors of the “old” way of doing things, with embedded and confusing fees: promises of “free,” complimented by disclosures so confusing that they’re never read; and charlatans that offer no real value in exchange for significant fees.
“The time is upon the industry to embark upon evolution before the change arrives in the form of revolution.”
But they’ll be an endangered species. Closing in on them will be a series of ones and zeros that simplify the commoditized parts of investment management and set a price for those services that is far below today’s average. Any additional fees will need to be earned through the delivery of real value provided by the professional advisor.
As advisors, we discuss the impending future, but we’re not doing anything about it. As leaders and professionals, we are charged with leading our clients to that which helps them, not waiting for them to force us to change. The time is upon the industry to embark upon evolution before the change arrives in the form of revolution. In the famous words of President Franklin Delano Roosevelt, “We have nothing to fear but fear itself.”
—By Steve Lockshin, a founder and principal of AdvicePeriod, as well as an investor in Betterment and partner in Betterment Institutional