The rise of robo-advisors represents an opportunity for U.S. financial advisors working with smaller accounts — particularly in light of new regulations coming into force, according to Boston-based Cerulli Associates’ 2016 second quarter report, The Cerulli Edge—Managed Accounts Edition.
Currently, there are almost 90 million U.S. households with investible assets of less than $100,000, according to the report, which was released on Wednesday. Yet, despite the size of this cohort, only 8% of advisors focus on these individuals.
Many of these investors are soon-to-retire baby boomers who will likely have to be more active in the management of their retirement income than they had originally planned — a task many may not have the financial knowledge to be able to do well.
“Addressing the needs of small investors should be an important objective for the financial services industry,” says the report. “Burdened with planning for retirement, but unequipped with the investment skills to do so, the middle class American investor needs help.”
Robo-advice is only one channel that the mass market may turn to for help if it’s unable to access traditional advisors. However, the Cerulli report points out that these new platforms may not be able to replace advisors entirely in light of the Department of Labor (DOL) Conflict of Interest Rule that will soon come into effect.
The Cerulli report argues that robo-advisors will not be able to meet the fiduciary obligations under this new rule because of the online onboarding processes they employ. For example, according to the report, one such robo-advisor claims it can roll over a retirement account in 60 seconds after asking the client four profiling questions.
“It can be argued that it’s impossible for an advisor to act as a fiduciary by determining whether a rollover is in a consumer’s best interest in 60 seconds or less, particularly if the advisor asks only four questions,” the report says.
Instead, Cerulli argues that a partnership between financial advisors and these new digital platforms are an opportunity for both traditional advice channels and the mass market. On the one hand, working with a robo-advisor will give an advisor’s business the efficiency and scale required to make working with smaller accounts economically viable.
On the other hand, clients with accounts of $100,000 or less will be able to access to financial advice that would otherwise be unavailable to them and that would perhaps better meet the standards of the new DOL rule. Says the report: “Combining human and digital advice can strengthen the fiduciary foundation of the client recommendations.”
Photo copyright: davinci/123RF