Online Advisors: How They Are Challenging RIAs to be Better, More Efficient, and Embrace Technology

CHICAGO - Oct. 7, 2014 - PRLog -- Firms who embrace these solutions should see their growth exceed that of their counterparts who ignore the digital investment tools. – Bill Winterberg, FPPad

  We are at a very interesting period in the RIA landscape where the automation of processes and push for business online has opened the avenue for a new type of financial advisor. This advisor is more nimble, quicker, and more automated. For better or worse, online advisors are challenging the RIA business in a significant number of ways. While traditional advisors have a number of advantages over the push online, these new models are challenging price and expectations of what one should receive for a lower price. Advisors that do not adopt to these changes, streamline their technology to focus on what differentiates them (relationships, market expertise, and advanced financial planning) may be challenged to be competitive and grow their business.

Bridge believes that the advisor of the future must support both the elements of traditional relationship building fortified with individualized financial planning; while, at the same time, he/she must understand the importance of creating efficiency and distribution through technology and automation. The problem started with an underserved supply that was easily tapped into, but online advisors have built a formidable business that is attracting young clients, less wealthy clients, and those that want to be involved in the market. The perfect opportunity for advisors to lead their field with a combination of technology, market expertise, business segmentation, and deep relationship building is here. Are you going to take it? I believe those that do will be rewarded, and those that do not will struggle to grow their businesses over the coming years.

It all starts with supply…

At the forefront of this issue is the population that the online advisor serves. Firms like WealthFront, Betterment, Nutmeg, and others are equipped with a number of differentiating features that has allowed them to tap into a new supply of underserved investors as well as tap into a younger population more accepting of doing important transactions online. The four key ways that the advisor has done this are:

v  Account Onboarding: With a streamlined onboarding process, clients can sign up in about ten minutes;

v  Data aggregation: Making it standard to aggregate all your data in one spot is crucial to the online advisor movement;

v  Marketing: The online advisor is operating in the spaces this population exists (social media, online advertising, etc.); and

v  Price: Prices are drastically less than the traditional advisor. Most online advisor advisors operate around 0.25% fee versus most RIAs around 1-1.5%.

Armed with these distinctions, the online advisor has been able to more easily generate relationships with younger generations, less wealthy clients, and those familiar doing important tasks online. Customers are getting exclusivity of a customized investing plan that takes out some aspects of complexity, but they are also doing it for much less. Further, the online advisor is not shutting the door to anyone, for better or worse. The supply has always been there --- the online advisor has just figured out how to capture it. As Bill Winterberg, CFP and founder of consulting and media resource, FPPad, notes:

The online advisory services were created to service a segment of the market that was underserved by most financial professionals. Feeling rejected and frustrated by established providers, startup founders felt it should not be so difficult to build a scalable investing solution powered by automation. So they built a low cost, functional option that targets the emerging investor.

It makes sense too. After the most recent financial crisis, trust in Wall Street dropped dramatically. Even five years after the crisis ended, a poll done by NBC News/Wall Street Journal showed that only 14% of US citizens have a favorable opinion of Wall St. Based on a cross-section of economic  hardship, lack of trust, and underserved population, a new supply of clients were ripened for a new way to think of financial advising.

The four advantages listed above work in tandem more than in exclusivity. Underserved/new individuals, such as Millennials/Gen X/less wealthy clients, demand less from advisors and have also lived through two financial crises at the start of their earning lifetime. The traditional advisor, with higher fees, does not seem as appealing, and the online advisor often offers what appears to be a more straightforward approach (more likely just simpler, thus more people understand it) with up front breakdowns of costs, risks, and plans for investing. WealthFront, for example, gives prospective clients a snapshot of exactly what ETFs they will be invested into in what can be as little as five to ten minutes.  The founders of these businesses have developed an ease at automating usual inefficiencies and scale online through a low-cost, efficient, streamlined business.

In a conversation that I had with Jeri Liedl, the Chief Operating Officer for Chalk, Cullum & Associates, a d/b/a of Trinity Portfolio Advisors, LLC, she noted that online advisors tend to recruit their own image. A younger generation that is more comfortable with a digital focus is clearly more comfortable letting computers and algorithms be the base for their investing.

Further, online RIAs are winning because investing has been popular in the past five years since the bottom formed in 2009. The online advisor has existed, for many respects, because underserved groups want to be in a tremendous bull market. As Brian Jack, Director of Information Technology for Budros, Ruhlin, and Roe, notes, “the biggest threat (to online advisors) today is a market correction.  Most, if not all, of these firms have started in a very impressive bull market.  We have yet to see how an online advisor’s clients react when there is a 10 to 20 percent correction.” This concern is something that investors should be keeping in mind, and this concern does get to the crux of the strength of RIAs, which we will discuss shortly.

The biggest win for these investment firms, though, may be that millennials will continue to become a bigger chunk of the investing population, especially as baby boomers begin to retire and move/liquidate assets, and they are becoming more and more comfortable with these automated formats of doing business. As Jack notes, “much of the online advisor offering’s growth is directly related to technology improvements and the public’s comfortableness with doing business on the internet.” The rise of technology is showing signs of disrupting the natural relationship between investors and advisors.

So…how big is the threat?

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