Robo-Advice and Family Investment Strategies May Mix Well

The assets controlled by today’s 34-year-olds will quintuple in coming years, but only 17% of adult children have a relationship with their parents’ advisors. Ignoring them may be one of the most significant mistakes today’s advisor may be making.

In fact, in the face of dramatic demographic change and the advent of robo-advice, an excellent opportunity is emerging to make current conversations between families and their professional advisors more efficient and meaningful, according to Nicholas VanDerSchie, Head of Advisor Solutions, North America, for Morningstar, who recently spoke to delegates at the Distinguished Advisor Conference (DAC) 2015, produced and directed by Knowledge Bureau. He cited several more important trends to consider in rethinking value propositions in the financial services; an important development that clients of advisors need to be aware of as well:

In Canada, more than 85% of advisors have over 10 years’ experience in the industry, and 44% have 10-20 years; however, client bases are getting younger as wealth begins to transfer to the next generation; as a result, new solutions will be required to service the needs of those younger people. In fact, the coming wealth transfer is massive: about half of all investible assets will be passed on from existing clients to their partner or their children.

Here’s the bad news for advisors: seventy-five percent of widows fire the financial advisor in the year after their husband dies. It’s important to establish relationships early, as couples contemplate their financial future together, rather than later.

Millennials, on the other hand, with their generally high levels of student debt, may not look that appealing as clients on the surface. But they should be thought of in a different way today: as HENRYs: High Earners, Not Rich Yet. These folks are the high-net-worth clients of the future and they need professional advice to plan life and financial advice. “To grow your practice in the future, you need to position it now to serve more of these younger clients. You need to find ways to serve them profitably today, although they do not bring the high net worth of your boomer clients . . . yet,” VanDerSchie pointed out. Boomer clients concerned about controlling the preservation of family wealth will want to initiate these conversations between advisors and their offspring.

He also noted that more and more firms are adopting a hybrid business model—digital combined with the human element—to serve the full range of their client base and to lay the foundation for growing their business with a whole new generation of clients. Clients will need education around those new models and how they impact their relationship with the advisor and his or her firm. Nicolas asked advisors to consider the full spectrum of investment advice, from highly customized for the high-net-worth client to automated robo-advice in order to better determine where groups of clients fall on the spectrum and what the appropriate service level is for each segment.

“For example, you may provide full, personal, custom service for your wealthiest clients, while offering younger ones with much lower investible assets ‘light advice;’” he said, adding, “that is, access to a human advisor via phone rather than face-to-face meetings, as well as online services and information.”

VanDerSchie noted that firms that offer this kind of hybrid solution for clients who are underserved by the full-service business model, command ten times the assets compared to those who offer digital (robo-advice) only. “Obviously the power of the human component is enormous, even if it’s on a call-in basis only,” he said.

In the US market, outsourced, automated advice solutions are 29% of the market and growing the fastest, whereas at the other end of the investment spectrum, custom advice represents 20%; however, the majority of the market, fully 51%, has moving to a hybrid model that combines human and robo-advice. Embracing the outsourced model at least to some extent has a number of benefits, he noted:

  • Allows you to service a larger number of multi-generational clients with varying degrees of wealth.
  • Enables you to focus on areas that add the most value and to outsource those that don’t, increasing the efficiency and profitability of your practice.
  • Frees you up to be a relationship manager rather than just an investment manager, and to add indisputable value for your clients as a result.

The moral? It’s a new world in the financial services. Incorporating robo-advice will help advisors stay relevant and to grow in the future; and may provide a number of new benefits to both Boomers and Millennials.

Evelyn Jacks is author of a new book available now: Family Tax Essentials: How to Build a Wealth Purpose with a Tax Strategy. To obtain a copy visit Knowledge Bureau website.


Posted under: Income Tax

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