It’s Time to Robo-Proof Your Business Model

A growing number of businesses are starting to focus on robo-advisors, who provide a simple process to match personal goals to a low-cost portfolio. Whether you think they are good or bad, there’s probably little protection from their impact. In fact, wherever you sit in the financial service supply chain, a robo will probably be “visiting” you, your clients and prospects soon.

In this article we will be exploring the impact of robos on the advice industry. While there are a number of advisory firms and advisors who are confident their business will hold firm against the impending, well-funded marketing of robos, others are building their defenses.

Many advisory businesses understand that they must move their client engagement to higher levels of discovery and personalization than that of robos. They realise the need to take into account clients’ individual needs and circumstances and add other services that clients value and for which they will pay.

Some advisors have reacted by adding their own low-cost robo service options. These investment adjuncts to their main offerings are targeted at smaller clients who have less demanding investment needs. Of course, some argue that this is akin to inviting the “fox into the hen house.”

Yet other advisors see robos as doing nothing more than providing low-cost, mid-quality investment solutions that meet clients’ simpler investment needs. They have no intention of providing a similar service.

The options for advisors

So what are the best options for advisory businesses? There are any number of client propositions that a firm might adopt. Five service offerings are illustrated in the graphic below, each with varying levels of personalization and catering to individual needs.

Box 1: The red box in the left-hand corner represents “traditional” investment advising with an emphasis on “finding” investment performance, often provided with little proven portfolio competencies and usually with limited client discovery processes.

Box 2: The dark orange box just to the right of the red box represents planning businesses giving advice utilizing simple investor risk profiling. Advisors often use tests with less than 10 questions and then link scores to model portfolios. This service can be carried out by a robo who can do it quickly, and reasonably accurately, at lower investment cost for single goals.

Box 3: The mid-orange box represents life planning and model portfolio services. The advisory practice typically uses goals-based planning supplemented with cash flow and sometimes Monte Carlo testing.

Box 4: The light orange box represents advisory practices that provide goals-based planning, usually supplemented with cash flow and Monte Carlo testing. They build personalized portfolios for clients using proven methodologies aiming to outperform simple model portfolios usually after analysis of tax, inheritance and control issues.