Sirianni: “Robo threat a sheep in wolf’s clothing…”
Robo Brokers are not the threat. The larger issue is commoditization, of which Robo Advising is just a symptom. Commoditization has been a boon to Advisors and clients offering more access and better services but, as the Robo trend demonstrates, Advisors must be nimble to stay on the right side of the coming changes.
Products and platforms commoditized first. Other than proprietary offerings, its hard to argue one platform, Wire or Indy, over the other in terms of products or platform access. Pretty much every platform has the same offerings. You can argue around the margins, TD has a great ETF offering, or Fidelity has a first rate Bond desk, but there is consensus around the most important products and services, and all the platforms have them. This parity of products has been the launch pad for Indy growth, without it no one would go Independent for fear of giving their clients inferior service, access, and returns.
Out of parity grew choice. Indy firms grew up around the platforms offering more and more comprehensive services that Advisors, now moving from the Wires, demanded. Advisor expectations, more than anything else created exclusive providers like Dynasty, revved Focus’ growth plans, and led firms like Hightower to build out all of their own technology functions like accounting, billing, compliance, and social media from scratch! It also led to a diversity of structure from elite high end partnerships like Steward Partners to a multitude of start ups with varying equity models.
But, there is a flipside to all this. Could the same logic that propels change be used on the agents of that change themselves? Could Advisors themselves become commoditized, their advice generically reproduced by an algorithm that’s much cheaper (and easier to manage)? Could Robo –Advisors replace them?
You get a sense that the larger the firm the more it wants to corral its Advisors into certain boxes with walls of compliance and regulation to do business. Its one of the motivating factors for going Indy, to get away from the vanilla similarity of the big firm. That very structured approach to Advising could be a stepping stone to broker commoditization. When big firms, Wire or Indy, remove the decision making capabilities from their Advisors they are aiding the commoditization trend. I would argue that when they limit broker choices in products like ETFs, insurance, or mutual funds they are doing the same thing.
If clients get a feeling that their Advisors advice is limited in scope by what their firm allows them to do or see, they can legitimately wonder if they would fall into the same “box” of investments at a rival firm down the street, the only difference being proprietary products.
There is a great rush to the middle by large firms today, as they seek to ape each others offerings rather than innovate. Fear of being left behind, rather than leading creates a self imposed commoditization of products and services. Add some attorneys and its not hard to see that Advice could be the next thing that would be limited at the big firms either through investment buckets for certain sized clients or through platform product exclusion. Once choices are narrowed, its not a very great leap to see that an algorithm could encompass all of the permutations within a limited scope.
Indy Advisors are better suited to adapt to any Robo trend. They have already used the low cost Robo providers to lower costs for their clients ( the efficacy of which remains to be proven). They are able to weave this option into their business because they hold the ultimate trump card: Indy Advisors can be paid for advice rather than by product. This makes commission robbing Robo trends less relevant.
Elliot Weissbluth recently addressed a gathering of multi million dollar producers and warned them that they take Robo Advising lightly at their own peril. Elliot has been cutting edge for some time, and his bell ringing should be heard and respected.
I have been in this business for almost 25 years. I have never seen commissions go up. When I started, mutual funds paid 8%, and not everyone could even tell you how much they had in assets, it was meaningless before fee pricing. So I have seen the industry weather big changes in how it advises clients, and how it gets paid.
Commoditization is the most powerful trend I’ve ever seen. Driven by technology, it has paved the way for both the Indy movement, and Robo Advising. Its leveling effect along with the Robos will have an impact on pricing and product. I don’t think Advisors will go away or be replaced. I do think that continuing commoditization will increase pricing pressure on money managers, platforms, and commissions.
Pricing pressure means Brokers, Consultants, and Advisors need to start thinking about Advice and not commissioned sales as the best way to make money. Advice is a lot trickier for a machine to mimic than a shrinking pool of approved investments.
The question for you is where will you choose to house your clients as commoditization continues to change our business in ways we are not even thinking of today.