What Is a Robo Advisor?

About 82 percent of advisors believe they have a clear understanding of what a robo-advisor is. Yet when describing what these things actually do, their answers vary widely, according to a recent survey by CLS Investments.

Forty-eight percent of the 134 independent advisors surveyed believe it’s a low-cost, technology-based financial advisor for the masses. About a quarter say a robo is an algorithmic-based program used to replace a financial advisor, and about 18 percent define it as technology used to communicate with an investor while providing financial advice. Nearly 9 percent admit to being unclear about what a robo-advisor actually does. 

But what the robo-advisor platforms are really doing is showing advisors how many clients increasingly want to interact with their financial lives, with real-time performance reporting and total transparency into their portfolios and investment strategies.

It's useful to think outside of the industry to see just how far apart client expectations of technology are from what advisors actually provide, said Todd Clarke, CEO of CLS Investments. The client experience has evolved; companies like Amazon, Zappos or Uber, where consumers find information and perform transactions online, are no longer exceptional experiences. But in the financial advice industry, most advisor websites are static pages; maybe there is a phone number or a limited email input as the only calls to action. 

Of course, the advice industry has always been behind when it comes to technology, it's just never mattered to the client experience before. “In the past, adoption by financial advisors of technology has been pretty poor,” Clarke said. “The majority of that technology, though, has been back-office technology that hasn’t been client-interfacing. (The robo advisors are) the first time that we have seen client-facing technology being introduced into the marketplace.”

There’s also a disconnect between whether advisors view robos as a threat or not. Nearly 97 percent of respondents believe conventional advisors and robo-advisors can “co-exist.” But at the same time, 78 percent of them see robos as a “potentially real” or “significant” threat to their business model.

Clarke uses the example of financial planning software that the advisor has control over and uses after discussions with the client. He or she then produces a printout report and a plan. It is inevitable that that technology will soon be available to the client.

“You’re going to see financial software change so that the client actually has that; the client controls that; the client’s able to make inputs and changes,” Clarke said. “I think that’s the direction that things are going. And anybody feels threatened when you start to lose control because they think that’s where their value is based.”

Six out of 10 advisors said they would trust a robo as a partner in helping them manage and oversee their clients’ assets, versus 40 percent who said they would not.

While a high percentage of advisors want to use the technology, whether they adopt it remains to be seen, Clarke said. He doesn’t know of a lot of advisors currently using it in their practices.

The technology can be seen as expensive, especially if the advisor has to build it. Over a third of respondents were over age 55; advisors nearing retirement are less likely to invest in new tech, although it may be a necessary part of an advisor’s succession and continuity plan.

“I think we’re going to get to a point here in the very near future where clients are going to demand that information and that technology from their advisor,” Clarke said. “It’s our belief though that if they don’t change and they don’t adopt this client-interfacing technology, they’re going to be out of business.”

TAGS: Technology
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