Editor's note: This blog article was originally published on November 11, 2015 and has been completely revamped and updated for accuracy and comprehensiveness.
Traditional advisors are going to find robo-financial advisors that use AI to produce financial plans and manage portfolios will be even more formidable in the future. Without a doubt, the bigger robo-firms are already building AI-based services that duplicate the services and interactions of traditional financial advisors.
This two-part blog article describes why investors are currently selecting robo-advisors for services that have been provided by traditional advisors in the past. Then we describe a five-part financial advisor marketing strategy that will help traditional advisors compete with robo-advisors who will be using AI to provide personalized services.
Once you understand their reasons for going robo, you are better positioned to compete with them.
At its conclusion, this article describes how traditional advisors can position themselves to be more competitive.
Smaller Asset Amounts
According to Statista the average robo account in 2024 will be $55,000. This is well below the minimum asset requirement for many traditional financial advisors who provide planning and investment services for one asset-based fee.
Keep in mind this is an average so a percentage of robo-clients will have assets that are substantially greater than this average.
Also, the minimum asset requirements for opening a robo account can range from none (Betterment) to $5,000 (Schwab Intelligent Portfolios). This will also drive down the average account size of the robo advisors.
Bad Experiences With Traditional Financial Advisors
Another type of investor had a bad experience with a traditional financial advisor in their community. There is a good chance they selected the wrong advisor and they are blaming the advisor versus the flawed process that they used to select the advisors.
At this point, they have three relatively frequent choices for obtaining financial advice:
- Select another traditional advisor
- Move their assets to a robo-advisor
- Manage the money themselves (pick a no-load mutual fund family)
It is unfortunate when the trust between investors and their financial advisors erodes to the point of no return. However, this does not change the investor’s need for financial advice they can trust.
Unrealistic Performance Expectations
Some investors are sold investment services that are based on excessive performance expectations. Unfortunately, a high percentage of financial advisors create unrealistic expectations to gain control of investor assets. They use finely honed sales and relationship skills to make these expectations sound realistic. There is no documentation for any of these unrealistic expectations.
All the investors know is they did not achieve the results they were told they could expect during the sales process. Based on the erosion of trust, their only recourse is to terminate their relationships with these advisors.
Will they trust a flawed selection process to pick another traditional financial advisor as a replacement? Or, will some of these investors believe they are better off with the passive investment management services that are provided by robo advisors that use AI to invest in ETFs?
Excessive Investment Expenses
More astute investors, regardless of their asset amounts, are becoming increasingly sensitive about the total amount of layered fees that are being deducted from their investment accounts each month. They may not believe they are getting adequate value for the fees that they are paying. They are measuring value based on performance, risk management, and personal services.
Bull Market Geniuses
Too many financial advisors, in particular the ones that sell investment products for commission, deliver competitive returns in Bull Markets and poor results in Bear Markets. As long as the securities markets are going up, investors are satisfied with their results after deducting all expenses.
On the other hand, these same investors may be very dissatisfied with their net returns during down markets. This is based on paying a substantial fee for a negative rate of return. It has been true for decades. Market volatility doubles or triples the traditional financial advisor turnover rate.
Solutions for Traditional Financial Advisors
It stands to reason more successful financial advisors take great pride in their minimum asset requirement. It implies they are good at what they do so they can require a bigger fee for access to their knowledge, advice, and services.
However, a robo advisor using AI for planning, portfolio management, and client services could be a game changer. Consequently, it may not be prudent to wait until the robo advisors invade their spaces. Imagine a competitor who can provide similar services for half the cost.
Following are five strategies that can be used to compete with the AI-based robo advisors of the future.
Hire a Less Experienced Advisor
Younger less experienced financial advisors tend to work with investors who have smaller asset amounts. This is part of their learning process before joining the ranks of more experienced financial advisors. Then as they gain experience and assets, they begin raising their minimums until it is eventually the same as the advisors with more longevity. Then it is time to hire another junior financial advisor.
Multiple Accounts
Many investors have a combination of larger accounts (the IRA rollover) and smaller accounts (the education funds for children). The investors expect their financial advisors to manage their larger and smaller accounts.
The smaller accounts do not generate significant revenue on their own, but they should be added to the larger accounts for the calculation of fees. This is fertile ground for robo advisors that have a low minimum asset requirement. Traditional financial advisors need a competitive strategy for multiple accounts.
Unbundle Planning
One reason traditional financial advisors have higher minimum asset requirements is they have bundled planning into their pricing. One asset-based fee covers planning, investing, servicing, and administration.
One alternative is to unbundle planning so the asset-based fee only covers the investment services. Then planning can be added to the asset-based fee or charged separately. This is a touchy subject when so many traditional financial advisors tell investors their planning services are free based on no additional fee.
Age Matters
There is a theory that millennials are much more accepting of technology-driven solutions for managing their assets because they grew up with technology. They are more comfortable letting algorithms manage their investable assets.
Younger investors with smaller asset amounts will be Robo's biggest potential market. Conversely, older investors are used to face-to-face contact with their financial advisors. You might say it is one of their expectations based on experience.
As the millennials mature there is a good chance they will continue to accept robo advisors and virtual meetings for staying in touch. Traditional financial advisors should consider hiring a millennial specialist.
AI-Driven Services
Many experts believe it is only a matter of time until Artificial Intelligence is producing complex financial plans and managing portfolios of securities. That may or may not be true, but there is a good chance the robo advisors will be positioned to take maximum advantage of this transition from traditional financial services to technology-driven services.
Millions of investors rely on the knowledge of financial advisors and registered representatives to help them make the right financial decisions. It is not a big leap to believe these investors could be better off relying on AI-generated solutions for planning their futures and investing their assets.
Forward-thinking financial advisors should be thinking about ways AI can be integrated into their services.
About Paladin
Paladin is a digital marketing agency that has worked exclusively with financial advisors since its founding in 2003. Paladin’s team of digital marketing professionals has more than 100 years of collective financial industry experience marketing our clients' services to individuals, families, and businesses. Plus, our team has decades of experience providing digital marketing services to financial advisors. Our clients range from start-ups to firms with billions of dollars of AUM. We are a full-service agency that provides website, SEO, SEM, Video, and Fractional CMO services. Want more information about our digital marketing services for financial advisors? Email: Info@PaladinDigitalMarketing.com to schedule an introductory call. We protect your privacy.
