During my recent attendance of the semi-annual Tiburon CEO Summit in New York, I was able to not only take in a great deal of information and ideas but I was also able to find a television and root for my wife’s alma mater (Duke) during their triumph in the college men’s basketball tournament. The Summit is held twice a year for clients of Tiburon and is a gathering of many of the leaders in the Wealth Management industry. As with the Fall Summit, one of the main topics was Robo-Advisors. This spring’s East Coast Summit took a subdued techie take on the Robo-Advisors; it was far more focused on the business model and the stresses reverberating across the landscape from a rather small set of disruptors. The main focus was who will survive in this evolution? Who will thrive and win?

As best as the Tiburon Strategic Advisors research can keep track there are no less than 37 online advice firms not singularly focused on online 401k advice. Some of these are names that are not yet on the radar of the typical advisor (CircleBlack and FlexScore), some are on the news/tv/radio seemingly daily (Betterment and LearnVest), and some are already household names that until recently you wouldn’t think of as being a Robo-Advisor (Charles Schwab, Morningstar, and The Vanguard Group). Based on this count, there are not quite enough to fill out a college tournament-style bracket but clearly, there are a few powerhouse names, several up and comers and a few “not yet knowns” looking to tackle the field.

There is nearly an unlimited number of ways to be a Robo-Advisor and to deliver the desired functionality:

• to have custody assets or not
• to provide advice and/or select the investment vehicles
• to execute trades or to guide the investor on what to do next
• to have loose cash in the model or not
• to be zero, flat or AUM management fee

Each angle and decision has an impact not just on the advisor’s success but also on the business model’s success. As an example, advice without activity is not worth the advice (investors need a good call to action) but advice with immediate execution puts the onus back on the solid advice.

I was very impressed with the singular focus the CEOs of SigFig and Betterment brought to the discussion when they took the stage. They go about aspects of the solution in a different manner from one another but the sole focus, in either case, is to provide a better investor experience – they let the investor make that definition up. It could mean compressed fees, a better experience, on-demand connectivity or controlling the advisor experience. It could mean speed to model execution – there was some discussion about moving towards funding to model execution within minutes.

As these firms take their seeding in the field of “37 Robo-Advisor Bracket Challenge” (possible trademark coming!) it will be very difficult for many of the up and comers and not yet knowns to knock off the likes of Charles Schwab, Vanguard or LPL Financial. It will be especially difficult for the smaller players to make it on their own and it may even be harder as these firms dip and continue to dip into VC or other funding sources to continue operations/development. At what point will these smaller Robo-players either choose to sell, be forced to sell or make adjustments to the model that will eventually sustain (and not just support) the business? When will it no longer be all about the client experience?

So who will survive and who will win?

• Investors – the model of .75% – 3% on AUM is being severely challenged – generalized fee compression regardless of the advice delivery method. Clients with different profiles – enablers, collaborators, controllers – will all have better, cheaper options to fit their need via live interaction or email.
• Established players (Schwab, Vanguard, LPL, TD) – ignoring the use of proprietary vehicles and the fees received by servicing other vehicles in the models, the real driver of profitability is simply c Cash earns the investor Y but can be lent out at 200*Y.
• Planning and Relationship Advisors (this is not a misprint) – Advisor choices will open up; an advisor’s ability to offer a Robo option and augment that with in-depth, personal, face-to-face discussions will be spectacular. Those clients desiring a personal, face-to-face discussion will have more opportunity and more time with those advisors.
• VC investment firms – plugging money into and taking control from these Robo-Advisor firms will reap substantial rewards.
• and 3-6 of the disrupting Robo-Advisor firms not associated or emanating from an established industry player will continue to press the industry for more, better, faster evolution for many years to come.

http://thechicagofinancialplanner.com/2015/03/16/schwab-intelligent-portfolios-robo-advisor/

https://www.betterment.com/schwab-intelligent-portfolios/

Patrick Flaherty( Director - CORE Product Owner & General Manager - Fee Manager )

Patrick Flaherty, CIPM, is the Product Owner for CORE Performance and Integrations as well as the GM of Fee Manager. In addition to shaping the strategic direction and development of both products, Patrick is responsible for overseeing the operations of the Fee Manager business unit including developing and maintaining client and partner relationships. In 2011, he completed the requisite study and exams for the certificate in investment performance measurement (CIPM).