Financial advisors will likely have to change their business models in order to hold on to clients in the face of competition from internet-based algorithms, industry experts say.
Advisors had better be prepared to explain their revenue models as clients ask questions about fees and the value they provide in exchange.
That’s the reality facing thousands of advisors as competition from internet-based algorithms, known as roboadvisors, exert pricing pressure on the investment advice industry.
“The ultimate outcome for advisors is they lose some clients to Schwab and Vanguard, but there is pricing pressure and they have to justify themselves,” said Chip Roame, managing partner of Tiburon Strategic Advisors, a consulting firm that tracks the investment advice market.
Pricing models are under pressure as the asset-gathering machine that sustained many a registered investment advisor (RIA) appears to have shrunk, according to separate studies on RIAs conducted by Fidelity Investments and RIA In a Box.
For advisors who extract revenue from a percentage of assets under management, income levels off as assets under management plateau.
“It’s very possible that the business model financial advisors rely upon today will not survive long into the future,” wrote Matt Lynch, managing partner with Strategy & Resources, an Ohio-based financial services consulting firm, in an article published Jan. 30.
Billions of dollars’ worth of assets that would have once been ceded to advisors have “gone the way of the robo,” and it’s no accident that advisors’ assets under management have dropped dramatically in the past five years.
Advisors Their Own Worst Enemy?
Losing billions of dollars in assets to roboadvisors isn’t just due to the aggressive and nimble growth strategies of online advice companies, or the do-it-yourself movement. The evolution is being helped along by traditional advisors being slow to change.
Pricing inertia, opaque fee models and price-value misalignment play their part in allowing advisory assets to heed the call of the roboadvisor, industry analysts said.
The collision of investor preferences, technologies and regulation “will require advisors to consider fresh pricing formulas to remain competitive,” said David Canter, executive vice president, practice management and consulting with Fidelity Clearing & Custody Solutions.
Results of a 2016 Fidelity RIA Benchmarking Study released in December found that organic growth among RIAs has dropped to its lowest level in five years.
The shrinkage is taking place against a backdrop of an aging client base, an aging advisor base where the average age is nearly 60 years old, and tougher regulatory standards.
Younger investors are likely to be more price-sensitive in an investment advisory industry affected by commoditization and advisors often overestimate the degree to which clients understand fee structures, the Fidelity research found.
Online Advisors: $290B in AUM
The speed with which internet-based advice models have gathered assets should give any traditional advisor pause. Assets managed by online advice companies soared to $290 billion at the end of last year from $16 billion in 2007, according to Tiburon research.
Of that $290 billion, the bulk – about $207 billion – is managed through defined contribution plan-focused advisors.
Online advisor units of the discount brokerage and mutual funds, as well as a bevy of online-only consumer-facing roboadvisors backed by private-equity capital, have siphoned off tens of billions of dollars from the consumer market.
Vanguard Group, TD Ameritrade and Charles Schwab lead in the online advice proffered by the discount brokerages, while Betterment, Wealthfront and Personal Capital lead in the pure-play online advice universe, Roame said.
At the end of last year, five discount brokerage firms and mutual funds had amassed $66.2 billion in online advice assets, and the 23 pure-play roboadvisors had $16 billion, he added.
By 2022, the discount brokerages, mutual funds and pure-play advisors will have gathered $1.4 trillion in assets, Tiburon estimated.
“People who don't think (the online advice) market will grow have their heads in the sand at this point,” Roame said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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