Robos, RIA Movement, Highlight Major Advisory Trends

By Brian O'Connell InsuranceNewsNet

Charles Schwab's most recent earnings report highlights key trends in the financial advisory arena, especially the advance of robotics, and the trend of RIAs going "independent.”

Call it a looking glass into the contemporary financial advisory market, where the key issues that cropped up in the Schwab report are big ones – like robotics, RIAs departing wirehouses at a faster clip, and escalating client assets.

“Our financial consultants held planning conversations with approximately 73,000 clients in the first six months of 2017, up 9 percent year-over-year,” said Schwab CEO Walt Bettinger.

Client balances receiving ongoing advisory services rose 17 percent year-over-year, faster than overall client asset growth, he added. These advised balances totaled a record $1.54 trillion at quarter-end, with $1.3 trillion under the guidance of a registered investment advisor and $242 billion enrolled in one of Schwab’s retail or other advisory solutions.

New net assets rose by $46.2 billion for the second quarter, and Schwab’s Intelligent Portfolios robo-advisory platform raked in $19.4 billion, a boost of 140 percent over the same period in 2016.

New Paradigm

RIA firms are “moving to an independent model,” Bettinger said, as more and more investment advisors move to fee-only business models after the U.S. Department of Labor’s new fiduciary rule rolled out.

That’s an issue that resonates with money managers right now.

“Breakaway advisors are forming RIAs and are choosing to custody their client's assets with Schwab,” said Levar Haffoney, a money manager at Fayohne Advisors in New York City. “Their low costs, relative to their competitors, has made Schwab an attractive firm for institutional and retail investors.”

Other investment advisors say RIAs are going independent because they’re generating higher fees and they have more room to do what they want to do, said Daniel Wachtel, a financial planner with Harbour Capital Partners in New York City.

“Now, RIAs are able to use different products that aren't approved at certain big wirehouses,” Wachtel noted. “Not everything is uniformed at a Morgan Stanley or Merrill Lynch.

“Bank of America has made it harder for some of the bigger names in the mutual fund space to bring over their whole product line and that sometimes means that clients at Merrill Lynch are missing out on some of the mutual fund firm’s best products and vice versa.”

Others say that the RIA “independence” issue is a major disruption for the industry.

“There is a significant amount of resources being invested in the area – and now by the biggest players on Wall Street,” said Megan Gorman, managing partner at Chequers Financial Partners, an RIA in San Francisco.

For example, in July, Goldman Sachs announced it would provide lending to RIA clients on the Fidelity platform, Gorman said.

“This is something that just didn’t seem possible 10 years ago,” she said. “But now, due to the influx of advisors going independent, the larger players are capitalizing on the opportunities that RIAs will provide to them.”

A New Age of Advisors

For RIAs, this is just one example where a new age of advisors can have access to the same institutional world that previously was limited to the larger institutions, Gorman explained.

“In fact, RIAs are being called upon more than ever by wirehouses and private banks who want to penetrate the RIA space,” she said. “And that is what tells you where the growth is.”

On the robo front – an area where big firms like Schwab are beginning to make great strides – the jury is still out on what the landscape will look like down the road.

“I see robos getting bigger, but fizzling out eventually,” Wachtel said. “Sure, they can pick stocks based on fundamentals or technical points, but robos miss on having any type of ‘out of the box’ thinking and any knowledge in the intricacies of the financial markets.”

Robos are not likely to be able to build the necessary relationships to survive, he said.

“They just don't have the experience, or even the ability to see markets three or six months out,” he noted. “A lot of advisory work is behavioral and our job is to cool clients down when things get over-excited.

“Plus, they won't be able to build a portfolio like Ackman or Buffett anytime soon.”

That’s not going to stop the big boys like Schwab from pushing robo-services going forward. That issue, along with more independent RIAs and more demanding clients, take center stage in the second half of 2017.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].