From robotic customer service agents programmed to critically think like humans, to phone applications that diagnose medical problems, nearly every facet of the economy is becoming more automated. As a panel explained at the 2015 NTSA 403(b) Summit, retirement plans are no different, and “robo-advisors” are challenging the foundation of the industry.
NTSA President Kent Schutte described the challenges that robo-advisors present to the industry, and also how their limitations create an opportunity for human advisors to capitalize on a new marketplace. Robo-advisors, Schutte said, are algorithms that are designed to provide the best investment advice without human interference and, as a result, at a lower fee than that charged for the services of a human advisor.
Robo-advisors are a legitimate threat, Schutte said, as evidenced by the amount of venture capital funding going into the industry. By one account from financial planning author Michael Kitces, venture firms have already invested more than $165 million in robo-advisor firms, including Betterment, LearnVest and Personal Capital.
“[Venture capitalists] put a lot of money behind it because they think it’s going to be a trend-changer and that they’ll make a lot of profit off of it,” Schutte said. “They have money behind it and they can influence legislators in D.C. and elsewhere… that they have algorithms that are better than we are.”
Schutte said advisors must be proactive in this adjusting marketplace, providing personal services that a robo-advisor can’t offer, such as financial planning services. Advisors can also react to the emotions or varying life changes of a client in a way that a robo-advisor cannot, something that Susan Diehl, NTSA’s immediate past president, discussed when talking about her husband, whose 401(k) plan at work is managed by a robo-advisor.
“My husband lies about his date of birth with the robo-advisor until the algorithm gives him what he wants,” Diehl said, comparing that challenge to the ease of working with a human advisor, who can be responsive to a client’s wishes without essentially forcing them to lie about themselves. “And when he calls them, there’s not one person at the investment company who would talk to him.”
Schutte said that the key is for advisors to do everything that the machines do, and more. He recommended that advisors allow participants to enroll online, and also suggested that advisors make themselves available to investors, especially younger ones, both online and via phone, which is time- and cost-effective for both the advisor and the participant.
He discussed how his Minnesota-based firm, EFS Advisors, is responding to the threats posed by robo-advisors. They have developed a mobile application, implemented more target date funds and greater fee transparency, and given participants the option of both enrolling online and speaking with an advisor that way.
In addition, Schutte recommended that advisors speak with every client — in person — at least twice a year if possible, in order to retain the human advantage that advisors have over machines. Additionally, the presentation accompanying the session suggested that advisors unbundle services like investment and longevity management.
“Especially for younger clients, they want to go online, they want someone they can call, and when they have a question, they want the advisor to be able to walk them through that,” Schutte said. “I think there’s a lot of ideas that we can take from the robo world and then add a personal touch that will make our lives more efficient and add some efficiency to the client as well.”
Robert Young, NTSA’s president-elect and a panelist at the session, told the crowd attending the wrap-up event at the end of the conference’s opening day that the rise of robo-advisors is just another adjustment to the industry — no different from others that they have had to deal with in the past.
“There have been a number of changes that have come along before, and your businesses got stronger,” he said. “We at NTSA will continue to offer guidance and we think that your businesses will still thrive and continue to be able to do well, so long as you’re out in front of this.”
NTSA President Kent Schutte described the challenges that robo-advisors present to the industry, and also how their limitations create an opportunity for human advisors to capitalize on a new marketplace. Robo-advisors, Schutte said, are algorithms that are designed to provide the best investment advice without human interference and, as a result, at a lower fee than that charged for the services of a human advisor.
Robo-advisors are a legitimate threat, Schutte said, as evidenced by the amount of venture capital funding going into the industry. By one account from financial planning author Michael Kitces, venture firms have already invested more than $165 million in robo-advisor firms, including Betterment, LearnVest and Personal Capital.
“[Venture capitalists] put a lot of money behind it because they think it’s going to be a trend-changer and that they’ll make a lot of profit off of it,” Schutte said. “They have money behind it and they can influence legislators in D.C. and elsewhere… that they have algorithms that are better than we are.”
Schutte said advisors must be proactive in this adjusting marketplace, providing personal services that a robo-advisor can’t offer, such as financial planning services. Advisors can also react to the emotions or varying life changes of a client in a way that a robo-advisor cannot, something that Susan Diehl, NTSA’s immediate past president, discussed when talking about her husband, whose 401(k) plan at work is managed by a robo-advisor.
“My husband lies about his date of birth with the robo-advisor until the algorithm gives him what he wants,” Diehl said, comparing that challenge to the ease of working with a human advisor, who can be responsive to a client’s wishes without essentially forcing them to lie about themselves. “And when he calls them, there’s not one person at the investment company who would talk to him.”
Schutte said that the key is for advisors to do everything that the machines do, and more. He recommended that advisors allow participants to enroll online, and also suggested that advisors make themselves available to investors, especially younger ones, both online and via phone, which is time- and cost-effective for both the advisor and the participant.
He discussed how his Minnesota-based firm, EFS Advisors, is responding to the threats posed by robo-advisors. They have developed a mobile application, implemented more target date funds and greater fee transparency, and given participants the option of both enrolling online and speaking with an advisor that way.
In addition, Schutte recommended that advisors speak with every client — in person — at least twice a year if possible, in order to retain the human advantage that advisors have over machines. Additionally, the presentation accompanying the session suggested that advisors unbundle services like investment and longevity management.
“Especially for younger clients, they want to go online, they want someone they can call, and when they have a question, they want the advisor to be able to walk them through that,” Schutte said. “I think there’s a lot of ideas that we can take from the robo world and then add a personal touch that will make our lives more efficient and add some efficiency to the client as well.”
Robert Young, NTSA’s president-elect and a panelist at the session, told the crowd attending the wrap-up event at the end of the conference’s opening day that the rise of robo-advisors is just another adjustment to the industry — no different from others that they have had to deal with in the past.
“There have been a number of changes that have come along before, and your businesses got stronger,” he said. “We at NTSA will continue to offer guidance and we think that your businesses will still thrive and continue to be able to do well, so long as you’re out in front of this.”
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