Today's Advisory Career

Two Sides of the Robo Divide

What it means for the fee-based future

by Mitchell H. Caplan

Mr. Caplan is CEO of Jefferson National, innovator of the industry’s first flat- fee investment-only variable annuity with the largest selection of underlying funds, named to Barron’s list of Top 50 Annuities for three consecutive years. For more information, please visit or call 1-866-WHY-FLAT (866-949-3528).

As the DOL fiduciary ruling heightens the demand to serve your clients with greater transparency and greater value, it comes down to this fundamental question: How can you use technology broadly, and robos specifically, to create more value for your practice, while helping to serve your client’s best interest and maintain a fiduciary standard?

Labor Department Secretary Thomas Perez has suggested that robo advisors are a solution for retirement planning, calling them a low cost alternative that can minimize conflicts of interest. Yet in March of 2016, just weeks before the announcement of the DOL fiduciary ruling, FINRA released guidance on robo advisors, raising concerns and calling for more governance and supervision.

Questioning whether robos can really know their clients and provide the best recommendation, FINRA CEO Richard Ketchum went on record saying that “whether it’s a human being or an algorithm,” the issues are the same, and the same rules should apply. This wasn’t the first time regulators raised concerns about robos. In late 2015, SEC Commissioner Kara Stein publicly questioned whether a fiduciary duty could actually apply to digital advisory platforms like robos—and whether existing laws should be revised to take this into account.

Strong Adoption Despite the Divide

Keep in mind, robo advisors aren’t advisors at all. They are digital solutions that provide a method for low cost portfolio allocations. As with any product or solution, both regulators and advisors alike have an obligation to ensure that robos are used in the right way to align with a client’s best interest.

There are critics and supporters lined up on both sides of the robo divide. Yet in spite of opposition, the adoption of robo advice is increasing. More advisors, Broker Dealers and even traditional channels like wirehouses have been turning to digital wealth management platforms—whether licensing, building their own or buying them outright. Aite Group estimated that digitally-driven assets would increase from $2 billion in 2013 to $53 billion by year-end 2015. Cerulli Associates estimates that the market for robo platforms used by advisors will be close to $500 billion by 2020.

If my doctor and my lawyer are bound by law to put my best interests first, why isn’t my financial advisor?

And while strong growth shows that they can play a role, one thing is clear: Robos alone are not the answer. Robos can never replace the value of guided advice. Make no mistake, the last thing a client wants is to call a robo – and get a busy signal. But robos combined with guided advice can help advisors efficiently serve multiple clients across their entire book of business, from the largest to the smallest.

Many critics of the DOL ruling have argued that it would cause smaller balance accounts to be ignored because managing them would be cost prohibitive. These same critics say that commissions paid to advisors by product providers help subsidize the cost of managing these accounts. This is where robos offer another option. More advisors today are now integrating robos into their practice as a solution for efficiently and competitively serving smaller balance accounts.

And as we learned in our 2015 Advisor Authority study, the majority of early adopters are currently using robos for their wealthier clients as well. Of advisors currently using robo, 52% report that they most often use it for clients with over $1 million in investable assets – and a full 20% say that they use it most often for clients with over $10 million in investable assets. As early adopters know, these digital advisory solutions can be effective for the low-cost and passively managed portion of any investor’s portfolio.

A Four-Point Plan to Evaluate Robos

While robos can simplify asset allocation and streamline portfolio management, it’s important to understand the optimal way to use them. Consider these four factors as a starting point to successfully integrate a robo solution to fit your fee-based practice – and help you keep your clients’ best interest in mind:

1. Understand how a robo solution fits into your practice:

  • Will it affect your business process?
  • Will it integrate with your existing technology?
  • Will it fit with your overall investment process?

2. Understand how a robo solution can serve your clients:

• How does it evaluate your clients’ risk tolerance?
• How does it fit into your clients’ overall portfolio?
• How does it fit into your clients’ comprehensive
financial plan?

3. Understand the underlying algorithm:

  • How is the algorithm constructed?
  • Does the algorithm have the ability to adjust as
    market conditions change?
  • How did the algorithm perform during periods of

4. Understand the fund lineup:

  • Is it sufficiently diversified – all asset classes and style
  • Low cost funds and ETFs?
  • Liquid alternatives?
  • Does it rely on proprietary funds?

The Future is Fee-Based – and Technology is Key

The DOL Ruling is a concrete step in an ongoing process. There has been a focus on reducing costs, empowering consumers and eliminating conflict of interest between advisors and their clients for years. Now, the evolution is moving at a much faster pace.

Technology has been a catalyst and a great equalizer in this process – and robo advisors are just one small part. The more lasting impact may be what thought leader Michal Kitces calls the “Bionic Advisor” – an advisor using technology to magnify the power of human capital – not diminish it or take its place. Technology empowers advisors to do more and offer more – even for their smallest clients – in a way that is more profitable and more scalable. Technology is also driving a secular transformation, shifting control from manufacturing and distribution directly into the hands of consumers.

As consumers become more empowered and better informed, they seek guided advice from unbiased advisors such as fee-based and fee-only fiduciaries. In a recent survey of more than 1,000 consumers, 77 percent said they would support legally requiring all financial advisors to put their clients’ best interests first when providing retirement investment advice. As DOL Secretary Perez said in his press conference, “If my doctor and my lawyer are bound by law to put my best interests first, why isn’t my financial advisor?”

The fee-based future is coming. The advisory industry has been moving from commission-based sales to fee-based and fee-only advice, and the pace is accelerating. According to Cerulli, AUM managed by RIAs and fee-based advisors will increase more than 60% from $4.1 trillion in 2015 to $6.6 trillion in 2019, and RIA and fee-based advisor headcount will expand from 59,000 to 67,000.

As more advisors shift to the fee-based and fee-only model, an increasing number of manufacturers and distributors are developing and adopting no-load and fee-based products to fit the way they work.

Combine the power of financial technology and the convenience of tools like robo with a human advisor playing by fiduciary rules, and you have the best chance to be more competitive and more relevant to your clients. Advisors who provide holistic unbiased advice can earn clients’ trust, deepen the relationship, and – in the end – attract more assets. The industry will learn what fee-based and fee-only advisors have known for years: When you put the power back into the hands of the consumer and you sit on the same side of the table as your client, both you and your client can win. ◊