Robo advisors have been branded as the root cause of fee compression, and it’s easy to understand why. Providing convenient, electronic, and in some cases largely automated services, many such platforms have significantly kneecapped the value proposition behind investment management.
But the existence of so-called digital advice — a term many would contend is a misnomer — doesn’t necessarily preclude human advisors from getting their 1%.
“[Consumers] aren’t necessarily throwing up their arms in resistance to paying for advice,” wrote Sara Grillo, CFA, on Advisor Perspectives. “It’s that their entire perception of the value of this advice has shifted.”
The fee rates applied before, Grillo noted, are no longer cost-effective for advisor services that fall short. Those include picking from a short list of ETFs and adjusting asset allocation based on a big-name financial institution’s model, servicing millennial children that don’t have a dime of their own, and so-called “comprehensive financial planning” that actually neglects estate, tax, and liability planning.
The advisors who’ll escape fee compression, she argued, would be either digital advisors or private bankers. Digital advisors would serve millennials or the mass affluent. For a flat monthly fee and a one-time initial set-up charge, they would have offerings like a client-only podcast or webinar, a 30-minute performance review, an exclusive monthly newsletter; additional fees could be charged for financial plans and phone- or email-based advice.
To work at scale, such advisors would have to consider using robo advisors to fulfill the needs of retail investors, some of whom would develop into high-net-worth clients. Services to high-net-worth individuals, meanwhile, could be outsourced to a turnkey asset-management platform that charges less than 50 basis points; additional fees could be justified with real planning on top of that.
As for private bankers, Grillo said, they’d have to provide truly sophisticated estate, tax, and liability planning to earn 1% on assets for their services. They’d also automate a myriad of technical aspects, and outsource investment to a third-party active manager that actually outperforms.
“Robos are not your enemy but an opportunity to overcome fee compression if applied strategically,” she said. “You aren’t competing with the robos; you are competing with your own ability to provide higher value.”
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