Make Room For The Bionic Advisor

By Linda Koco InsuranceNewsNet

ARLINGTON, Va. – Robo advisors are much in the news, but the trend to watch is bionic advisors, according to a software executive who will speak here today at the annual Retirement Industry Conference sponsored by LIMRA, LOMA and Society of Actuaries.

Robo advisors generally are thought of as online services that create personalized investment advice for consumers in quasi-robotic fashion. The advice arrives with limited or no human involvement with the client.

To date, the investments recommended by these firms tend to be low-cost passive index investments, Rich Ellinger, CEO and founder of Wealthminder, told InsuranceNewsNet in advance of his presentation.

By contrast, “bionic advice” refers to human advisors who use electronic advice software as an integral part of their practice but who still interact with the client, Ellinger said. His Reston, Va.-based firm provides such software to independent advisors in the registered investment advisor (RIA) channel.

The bionic advisors use specialized advice software to create investment recommendations for clients based on age, risk tolerance, assets, income and other factors. This is somewhat similar to what robo advisors do. The engines in both cases are computerized algorithms.

However, once the system-generated results come back, the bionic advisors inject the human element into the advice service.

For instance, the advisor might tweak the plan or specific recommendations, based on other information (client goals, needs, family situation, wealth management preferences, business matters, etc.). Or the advisor may incorporate other factors into a plan that the automated system does not handle. The advisor then presents the final plan to the client for review and approval, and ensuing consultation, he said.

Lower cost and more transparency

Both types of service provide advice at less cost than traditional advice models due to the technology involved, Ellinger said.

In a traditional model, human advisors typically meet with clients in person or through video conference, and then develop investment and product recommendations and plans in a personally crafted approach. Many use computers but not necessarily advice software or systems. Most provide a full complement of personalized guidance, education, planning and products.

In addition, bionic and robo approaches both provide more transparency in pricing than do traditional advice models, he said. They also may provide more transparency in performance and even products.

But the bionic approach differs from robo in a key area of interest to human advisors. This has to do with the advisor’s role in providing advice, Ellinger said. It keeps the human advisor in the picture.

The advisor may provide the client with much-needed validation, education and other personal touch services, for example. This is in addition to reviewing the advice software’s recommendations or plans with the client and adjusting the results as deemed necessary.

Fee compression brought about by not only robo advisors but by lower-cost exchange-traded funds is prompting more traditional advisors to consider the bionic approach, Ellinger said. These advisors increasingly are emphasizing the value they provide through comprehensive planning, tax advice, holistic services, and overall guidance and counsel, for example.

In the process, they are able to provide their services at a lower cost than in a traditional advisory model, and that is enabling them to reach markets they previously could not.

Target market

Ellinger pointed to the middle market as an example. “Most middle-market households don’t have enough money to form a viable economic relationship with a traditional advisor,” he said. “Yet industry research indicates that at least half of these households do want to work with someone, or at least to be able to run things by a professional.”

Advisors using the traditional advisory model have difficulty serving this market, he said, because “the cost of serving the lower-net-worth person in that model is nearly the same as the cost of serving a high-net-worth person.” But in a bionic model, the advice is provided more efficiently so the advisors can go after this underserved market and “do it at a lower overall cost.”

Advisors may move away from charging a fee based on assets under management, he said. “We might see advisors doing more flat-fee pricing — by, say, charging an annual fee, to cover ‘all the things I do for you’ — and maybe also charge a lower fee than they did before on the investment management side.” Or they could do subscription fee of a flat amount per month.

He doesn’t foresee commission-based products being distributed in this environment, however. That’s “due to lack of transparency in the products as well as the pricing.” But he added that, at his firm, “We’re compensation and product agnostic.” So if someone finds a way to do it, that’s OK with him.

As he envisions the bionic model, the fee charged would be “commensurate with the work done for the client.” But the overall approach could give the advisor a way to serve the market in a way that is transparent and cost competitive.

Annuity question

Might bionic advisors sell annuities as well as investments? The products could become part of the electronic platforms if their designs are simple, he said.

If that happens, the attraction for customers would be lower cost, ease of purchase and greater transparency as compared to traditionally sold products, he predicted. The advisors would put greater focus on the guidance they provide, with a “clearer, crisper message about when and why a particular annuity is right for the client.”

But Ellison doesn’t see that happening now, due to the complexity of many of today’s annuities.

He doesn’t rule that out for the future, though. “Robo services have helped bring lower costs, ease of purchase and greater transparency to the investment world, so they could do the same in the annuity world.” There will be opportunities and challenges in that, he allowed, but it will probably happen.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].