Robo-Advisor

The Robo-Advisor Value Proposition – Systematizing And Automation
Morningstar’s “gamma” research. Which means in the end, robo-advisors may be less of a threat to traditional advisors, than simply an acknowledgement that inefficient advisors that don’t systematize and utilize technology will be increasingly threatened by those who do – whether robot, or technology-augmented human.

Underlying the robo-advisor model, though, are insights that are relevant to any financial advisory firm. For instance, the core building blocks of robo-advisors – a systematized investment process, supported by programmed technology automation to implement the portfolio – is not actually unique to robo-advisors at all. Any advisor – human or robot – can use these tools, and they already exist!

In fact, it turns out that many financial advisors already deliver everything that robo-advisors do, and more; advisory firms have been increasingly shifting to model-based portfolios for years, and “intelligent” rebalancing software that replicates virtually everything a robo-advisor already does has been around for nearly a decade, as has been shown indirectly by Morningstar’s “gamma” research. Which means in the end, robo-advisors may be less of a threat to traditional advisors, than simply an acknowledgement that inefficient advisors that don’t systematize and utilize technology will be increasingly threatened by those who do – whether robot, or technology-augmented human.

One of the primary reasons that robo-advisors enjoy such efficiencies – and are even capable of automating so much of the trading, rebalancing, and tax-harvesting process in the first place – is that their portfolio design process has been entirely systematized. In practice, many – but certainly not all – advisory firms implement portfolios similarly, though in the advisor context they are typically labeled as “model” portfolios, such that clients are allocated into one of a series of model portfolios based on their goals and risk tolerance.

the reality of the advisory landscape is that many advisors already fully deliver the entire core value proposition of the robo-advisor, and have for years, by implementing a consistent range of model portfolios appropriate for client goals and based on their risk tolerance, implementing with “intelligent” rebalancing and trading tools that allow the portfolio to be continuously monitored, rebalanced as soon as it is appropriate to do so, and managed on a highly tax-sensitive basis proactive tax loss harvesting

In fact, ironically the Wealthfront robo-advisor value proposition is remarkably similar to the benefits articulated by Morningstar researchers as the “gamma” that human advisors already bring to the table!

only 40% of advisors are even using some form of rebalancing software, and for many the blocking point is not just a failure to invest in technology, but a failure to systematize their investment process into model portfolios that would even make rebalancing software feasible and really effective in the first place.

In essence, having 100 portfolios for 100 clients means 100 sets of investments that require research and monitoring, while having all clients allocated to “just” 5 portfolios allows the firm to reduce its due diligence burden by 95%! In other words, having model portfolios allows the firm to gain the same efficiencies as a robo-advisor to focus on establishing the lowest-cost “most optimal” portfolio for clients.

While historically, advisors implementing a different portfolio for every client has been defended under the auspices of “we fully customize our solutions to the unique circumstances of each client,” in the future such an approach will increasingly opens advisors up to the criticism that they can’t possibly do an effective job continuously monitoring portfolios and performing appropriate due diligence on client investments the way a robo-advisor can. In addition, advisors open themselves up to criticism that they should just have a portfolio representing their “best ideas” and strategies, rather than having as many different investment approaches and portfolios as there are clients, which is almost impossible to all be the best ideas!