Remember when we all had flip cell phones?
That technology has been replaced with newer better “smartphones.” It wasn’t that long ago that this revolution began and now each year we eagerly await the latest edition of iPhone 10. This has been accomplished in less than 10 years, 10 years of a massive technology shift.
Now consider how the next generation will interact when it comes to their retirement planning. I have been writing a lot lately about the “do it yourself” approach to financial planning, the ROBO advisor. A recent report in Financial Planning Magazine looked deep into this issue. It isn’t how much the ROBO advisor is managing now, and it is how much will it be operating in 5 years that is a concern.
The financial services sector of our industry is over $33 Trillion according to Corporate Insight with ROBO advisors managing a tiny sliver of it. The concern is about those 20-40 now and their reliance on “smartphones” and apps to complete almost any task. Why not use an app for financial planning? To this age group, it makes near perfect sense. Aren’t their apps for everything?
Those of us in a little older age group rely on our experiences, and we know that human support is a vital part of any planning option, that and the practical use of available financial tools.
What the ROBO advisor will bring to the planning game is obvious, lower fees for advice. The millennial have already entered this world via iPhone apps and since a ROBO planner to them is no different than hitting the summon button for Uber.
The shift in this type of planning brings to a forefront an important question. Who controls the ROBO market? Who will the big players be? The answer is quite simple, either be a ROBO player or go live in a museum because that will be the options. ROBO advisors may not have the “human” touch, but they will have the algorithms to offer reliable advice. Their advice is backed up many zillions of pages of research, research that is not even available as we know it today.
You will see a substantial shift in Broker/Dealers sending more and more money to their digital platforms to offer more and more options. This will create an integration of these tools in an easy to understand communication system.
I can even give you an example, a couple of years ago my wife, friends and I went to Las Vegas to see a football game. In walking through the casino one night, we stumbled upon a 3-d lifelike (almost human) blackjack table offering to deal us digital blackjack. She was so real it seemed like a dream and then came the new dealer, yes, just like in a real blackjack table, the dealer changed, and a new 3-d video dealer took over, offered a welcoming gesture and started dealing.
Could that be the future of ROBO advisors?
What will be the cost to the financial planning sector? How much money will a ROBO advisor save the private investor? Or will the owners of the ROBO system merely keep the extra and add to their profits? My guess is simple; the ROBO advisor will start a price war and planning as we know it will never be the same.
As larger (and medium) broker/dealers move to the ROBO market, a price war would force a downward plunge in revenues for the planning industry. Not only would fees lower for the ROBO advisor but traditional advisors would need to lower just to compete. Just think of the Schwab TV ads that will be coming, do it yourself and save big money. Fee structures will drop; clients will get more for their dollar and who loses? Naturally, the industry will lose revenue, some estimates as high as $12 billion a year within the next 5 years.
The simple fact remains that many people like and need the human touch side of the critical parts of the planning process, not all of us think an app on an iPhone is the best way to make sure planning goes as planned.
In our small section of the industry (fixed indexed annuities) I think the mere fact that we charge no fees for putting in place a new product will have merit, added to the fact that we are also available to those who need support and service. Plus we have a tax law advantage. The concern about long term planning the securities industry is worried about is the coming 20-40 age group. Annuities are not practical for them (yet) only because annuities are designed for those who wish to use their benefits after age 591/2. That simple tax advantage makes our industry more removed from ROBO advisors than does the financial planning sector with their need and desire to sell securities.
Annuities have their place, and my guess is a ROBO advisor will not be a threat to our small slice of the financial services industry for many years to come. In another 20 years, who knows what the capacity of a ROBO advisor might be. Heck, they could be the ones driving your Uber car, offering Starbucks all at the same time balancing your checkbook and telling you what stocks to buy and sell.
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