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YOUR PRACTICE-Advisers' launch of 'robo' services seen as bold move
April 14, 2015 / 2:10 PM / 2 years ago

YOUR PRACTICE-Advisers' launch of 'robo' services seen as bold move

(The writer is a Reuters columnist. The opinions expressed are her own.)

By Hilary Johnson

April 14 (Reuters) - Some flesh-and-blood financial advisers are competing head-on with so-called “robos” by providing their own low-cost automated investment advice services.

David Edwards, chief executive of New York-based Heron Financial Group, is one.

Since September, Edwards has spent about $40,000 and countless hours on a new, low-fee digital advice platform aimed at younger clients who want to handle their investments online.

There is reason for traditional advisers to worry about competition from “robo-advisers,” which use algorithms to manage portfolios at a fraction of a human adviser’s typical 1 percent fee. Assets managed by the automated services, which include Wealthfront Inc, Betterment and Charles Schwab Corp, will increase at least three-fold this year, to as much as $60 billion from $16 billion, according to a March report by Aite Group, a Boston-based research firm.

Edwards’ offering will use an algorithm from Betterment Institutional, a digital platform for advisers from Betterment LLC, to select investments and tweak portfolios. Edwards will charge clients 0.75 percent of their portfolio, instead of the 1 percent and up he charges for traditional stock and bond picking and other services.

Edwards sees it as an investment in his firm’s future.

“The firms that don’t have a digital platform for clients will be extinct in five to 10 years,” he said.

Providing an online investment management option that costs less than adviser’s usual fee is a bold strategy, more so than using practice management software such as Oranj, because it segments the business.

Advisers must weigh the pros and cons of doing so, said Sophie Louvel Schmitt, senior analyst at Aite Group. Those who invest in such an offering could boost their chances of reaching a younger generation. “But before they do that, they should make sure they’re not cannibalizing their business, and providing enough value to existing clients to justify the higher price,” Schmitt said.

Ritholtz Wealth Management in New York launched Liftoff, its digital-only platform, last fall. The service caters to those with at least $5,000 to invest, and they pay 0.4 percent of assets under management annually, compared with the traditional Ritholtz client, who has at least $1 million and pays 1 percent to 1.25 percent in fees per year.

The firm made some tweaks during the first six months, such as adding a way to accept transfers from outside investment accounts and streamlining the process for answering clients’ questions, Ritholtz Chief Executive Josh Brown said.

“It’s about what we expected in terms of ongoing maintenance, which is not much at all, and that’s critical to being successful,” Brown said.

Brown declined to comment on how much Liftoff manages. But he counts more than 1800 people who are either established users or are signing up.

Brown, like Edwards, hopes some digital clients may eventually become traditional wealth management clients.

But he is also betting that the digital platform may be used in some form by all clients, regardless of account size or fee schedule, and that makes it a worthwhile investment.

“This is something that we think will pay dividends very far down the road,” Brown said. (Reporting by Hilary Johnson; Editing by Suzanne Barlyn and Meredith Mazzilli)

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