How To Exploit The Achilles Heel Of Robo-Advisors
June 7, 2016
by Dan Solin
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A lot has been written about the rise of robo-advisors. But Michael Kitces was correct in his observation that “the simple reason why robo advisors are no threat to real advisors is that the services they offer are nothing like the comprehensive financial planning process offered by a true financial planner.”
A pivotal difference between robo- and human advisors is the level of fiduciary care they provide to clients. Understanding how to exploit this Achilles Heel will allow planners to compete effectively with the next generation of technology-enabled advice.
Low fees and automated advice
This comes as little comfort to traditional advisors, who are losing business to robos. Credible sources predict robo-advisors could be managing as much as $489 billion by 2020.
Others believe that this projection is too modest. They estimate robo-advisors could manage as much as $2.2 trillion by 2020, representing 5.6% of Americans’ total investment assets.
Most traditional advisors can’t compete with the fee structure of fully automated robo-advisors like Betterment and Wealthfront. Wealthfront charges no fee on the first $10,000 of assets under management and 0.25% on amounts over $10,000.
The standard investment advice offered by robo-advisors is generally sound. They typically recommend a globally diversified portfolio of low-management-fee exchange-traded funds. They also offer rebalancing and tax-loss harvesting, among other services.
The claim of fiduciary status
As Registered Investment Advisors (RIAs) with the SEC, robo-advisors advertise their fiduciary obligation to their clients. For instance, Wealthfront states, “As an SEC-registered investment advisor, Wealthfront assumes the full fiduciary standard of service for our clients, meaning we always have to act in their best interests and deliver the best possible service we can, with no conflicts of interest.”
The combination of sound investment advice delivered online, ancillary services and the acceptance of the fiduciary standard (which governs all RIAs) makes robo-advisors formidable competitors.
Confusion over what “fiduciary” entails
All RIAs have a fiduciary obligation to their clients, but there is no universal agreement about the contours of that duty. In one well-researched paper, Lorna A. Schnase compiled a list of duties from a variety of sources, including common law, state and federal case law and SEC guidance. These duties include providing a standard of care that requires eliciting sufficient information from clients so that advisors can intelligently assess risk tolerance and advise appropriately on investment matters.