Live vs. automated?
The competition appears to be heating up across the financial services industry as robo-advisors eye a greater share of the wealth management pie. A majority of RIAs (72%) indicate that Millennial clients would be interested in robo-advisors, according to the 2016 Scottrade® Advisor Services RIA Study.* Sixty-eight percent of advisors who responded to the same survey said they think online management services like robo-advising will have a role in reducing the number of prospects for advisors. A previous Advisor Advocate article called attention to the robo-advisor trend and suggested the advisor who effectively combines personal service and the latest technology may gain the upper hand.
Advisors may be intrigued by a recent study that indicates robo-advisor automation has its limits for clients who seek long-term investment solutions. The study, “The Short-Term Nature of Robo Portfolios,” was written by Stephen J. Huxley and John Kim, both with Asset Dedication LLC, an asset management platform for financial planners. It was published by the financial newsletter Advisor Perspectives.
Huxley and Kim argue that equity portfolio asset allocations recommended by 4 prominent robo-advisors for investors in the “moderate risk” category appear to be most appropriate for clients with 1-to-3-year time horizons. The problem is that many clients of robo-advisors are under the age of 40. If their goal is saving for retirement, the time horizon for their portfolios may range well beyond 10 years. Huxley and Kim say that, as a result, portfolios recommended by robo-advisors may not be aligned with the timing of when clients actually plan to spend their money.
To arrive at their conclusions, the researchers studied potential returns of portfolios clustered into 4 time segments. They stress that they did not employ traditional mean-variance volatility over a quarterly or annual timespan to define portfolio risk. Instead, arguing that poor market returns cause the most damage to long-term financial plans, their research strategy focused on how a worst-case scenario might impact portfolios over 40 different time periods. They explain their methodology in an appendix to the article.
The researchers also found fault with the adequacy of risk tolerance questionnaires used by robo-advisors to determine asset allocations.
Portfolio Management Resources
Explore the Scottrade® Strategic Resource Center to connect with companies that specialize in portfolio design and management. Many of these resources offer discounts to advisors who custody assets with Scottrade. (Scottrade provides this resource for informational purposes and does not specifically endorse any of the businesses within the directory. Scottrade also does not pass judgement as to whether those services are appropriate for specific business needs. Be advised this is not a full and comprehensive list of businesses that offer these types of products or services and that advisors are responsible for doing adequate research before making any purchases.)
*About the 2016 Scottrade® Advisor Services RIA Study
The 2016 Scottrade® Advisor Services RIA Study was conducted July 25 – Aug. 9, 2016, in collaboration with Harris Poll, an independent third-party research firm not affiliated with Scottrade Financial Services, Inc., its business units or subsidiaries. The 303 Registered Investment Advisors were aged 18 and older and were employed at firms managing at least $10 million in assets under management.
This online survey was not based on a probability sample, and therefore, no estimate of theoretical sampling error can be calculated. For more on the 2016 Scottrade® Advisor Services RIA Study, visit the Scottrade® Advisor Services RIA Study site at https://about.scottrade.com/media/research-findings/advisor-services-study.html.