How Robo Platforms Transform Traditional Advisory Business | Financial Advisors

Financial advisors are increasingly turning to robo advisors, technology platforms that not so long ago were viewed as fierce competition.

At their most basic, robo advisors provide digital, algorithm-based investment platforms. The first company that offered this service was Betterment, which launched in 2008 and began opening client accounts two years later.

Initially, robo advisors operated with little, if any, human interaction. They would gather data from clients using online surveys. Based on those results, the robo advisor would assign the client to an inexpensive portfolio of index exchange-traded funds that would be rebalanced at specified intervals, determined by an algorithm.

That basic model still exists, but robo advisor firms now offer a greater range of services. Some added mutual funds as part of their offerings, some can hold single stocks and others include financial planning software or even sessions with a human financial planner.

Several companies now operate robo advisors. In addition to Betterment, the roster includes Personal Capital, SoFi, Ellevest, SigFig, Vanguard, TD Ameritrade and Charles Schwab, among others.

In response to the growth of robo advisors, traditional advisors ramped up their planning capabilities and emphasized their personal touch and ability to address any complex situation a client may have.

While those remain key points of differentiation, it turns out that robo platforms actually free up traditional advisors to provide more service. The robo firms offer special platforms just for financial advisors to hold client accounts. The robos handle rebalancing, as well as performance reporting and billing, allowing advisors and planners to focus on big-picture planning topics with clients.

Because robo platforms are inexpensive, financial advisors often use them for smaller accounts or clients with fewer investable assets. That’s a shift from the traditional focus on high net worth clients.

“To continue to grow, the financial planning industry will need to evolve and serve clients who may have traditionally felt left out of the conversation,” says Kevin Smith, vice president of Wealthspire Advisors, based in New York.

Smith’s firm launched Wealthspire Pathways, a digital advisor platform that combines low-cost automated investing with a tailored financial plan and a dedicated advisor. These services have historically been available to higher net worth clients, but Smith says the firm’s robo offering is a way to engage a greater range of clients, especially younger investors.

Smith acknowledges that the emergence of digital advisor platforms disrupted the financial services industry, leaving many advisors wondering if their relationship structure would become obsolete.

He says Wealthspire Pathways was designed to use digital technologies while preserving the personal relationship that clients typically expect.

“It reflects the future of financial advice, which lies in embracing new technology in a way that not only enhances the client experience but makes our expertise more accessible,” he says.

“As a firm, we felt that there is an unfulfilled niche for people that could greatly benefit from financial planning but believe it is a service only for the wealthy or that they would be better off doing it themselves to save money,” Smith adds. “The fact is that those with lower assets or without industry knowledge often stand to gain the most through professional planning.”

Gwen Garrison, president and financial advisor at LifePlan Financial Advisors in Newnan, Georgia, uses a robo platform called $ymbil, developed by her firm’s broker-dealer, Ladenburg Thalmann, and designed so clients with fewer assets can begin investing.

When the platform launched, Garrison says, she was delighted. “It’s kind of like an incubator. I still use it for small accounts for whom a more traditional portfolio manager account is too expensive relative to the size of the account.”

Garrison appreciates that $ymbil includes her contact information on a client’s log-in page. “So if they need help, they can call me. I also can monitor the accounts and see how they are doing. We set an alert for when the account reaches the goal that we set for the incubation period,” she says.

Most of Garrison’s clients are middle income and don’t fall into the high net worth category.

“They do not know a lot about investments and want someone watching over their investments, even in a robo advisor,” she says. “They are vulnerable in that if they have major losses, it can seriously impact their ability to be financially secure now and in retirement.”

Andrew Komarow, founder of Tenpath Financial Group in Farmington, Connecticut, also uses a robo platform for clients with smaller accounts. Because the robo advisor charges low fees, it’s an efficient way to serve these clients. He uses a service offered by his custodian, LPL Financial.

“For smaller accounts to scale effectively, you can’t be bogged down with trading,” he says. “If someone is interested in working with me and they fit my model, then I will absolutely mention it. At the end of the day, the clients are working with me for the value add I provide.”

He found that the robo platform is also useful for existing clients who may be making small contributions to a qualified retirement account, such as a Roth individual retirement account. “Instead of charging more for smaller accounts, I charge the same, and the robo might charge slightly more,” he says.

Taxable, or nonqualified, accounts pose a challenge for advisors using a robo platform. Moving an account to a robo platform usually entails selling existing positions and reinvesting in an ETF or mutual fund model. Because many of these taxable accounts have large capital gains, a move to a robo platform could result in a large tax bill for the client. That’s something most advisors want to avoid.

David Hicks is an investment advisor at Oakmont Advisory Group in Albuquerque, New Mexico, and founder of Smpl Wealth, a robo-based advisory platform. Hicks says his firm now handles taxable accounts both inside and outside of robo advisors.

But all accounts are reviewed before transitioning to a robo strategy. “If an account is simply moved to a new strategy and no due diligence has been performed, then a transition could potentially cause unnecessary capital gains,” he says. “On the other hand, passive strategies are often best for taxable accounts, and an automated option will be more efficient over the life of the investment.”

Wealthspire’s Smith also acknowledges concerns when it comes to capital gains taxes and reallocating into a robo platform.

“It absolutely is a problem to just dump a taxable account into a robo without first reviewing the potential tax consequences,” he says. “We always review the embedded gains in a taxable account before it is transferred to the robo and have a conversation with the client about the tax consequences.”

Smith says the biggest concern for advisors using a robo offering is to be sure clients understand how it works. “Communication is key here. Making sure the client knows any positions transferred into the robo account will be liquidated and the model will be purchased,” he says.

He adds that it’s important clients understand they can’t make direct trades in a robo-advised account, as all securities are part of a model. “This also means a robo account should always be used as a long-term investment account. It is not ideal to use a robo if you have a need to constantly withdraw funds and need instant access to those funds,” Smith says.

Hicks also has a suggestion for financial planners and asset managers considering a robo offering.

“There are more options available now, so my advice is to pick the one that makes the most sense for your tech stack, so it can be more easily integrated,” he says. “It’s really easy to be sold on a certain robo offering. It might look great on paper, but later you find out that it doesn’t communicate well or perform well on the service side. It can take some trial and error to find the right robo offering, and clients are often at the mercy of that practice.”