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How to Complete with Robo-Advisors

Online-advice providers, or robo-advisors, are getting their fair share of publicity and funding. Earlier this year for example, Betterment said it had raised $32 million in fresh assets, bringing its total funding to $45 million. LearnVest, meanwhile, has also announced substantial success with its fund raising efforts.

At first blush, the services appear to be a threat to traditional financial planners as the services offer extremely low fees while also being available to investors with smaller accounts. Some robo-advisors maintain that their ideal client size is $20,000 to $30,000.

Some industry executives have readily dismissed the competitive threat to traditional advisors of the online services. The executives point to their focus on smaller accounts and say other threats to advisors, including discount brokers, haven’t made full-service advisors obsolete.

Yet, robo-advisors’ willingness to accept small investors doesn’t mean they should be dismissed as potential competitors for larger cases. After all, as the services build out their offerings, they are likely to consider a run for larger (and more profitable) clients.

For advisors, the challenge is to be prepared to ward off competition from the services, or at least be prepared to respond when the services begin to court larger clients.

To do so, advisors should hone their sales pitch to talk about the value of working with a full service advisor. In doing so, advisors need to walk a fine line between providing concrete examples of how financial advice can help individuals reach their dreams and going overboard with information that may glaze over the eyes of even the most promising prospects.

With that in mind, the focus should be on the merits of having a personal, face-to-face relationship with an advisor that can understand each investor’s unique situation and provide customized investment recommendations. What’s more, advisor should argue that unlike automated advice platforms, they can serve as cheerleaders for clients and help provide support when clients have reservations about sticking with their budgets, retirement deferral rates, asset allocations, and other savings strategies.

The appeal of a personal relationship, you should add, includes more than just an advisors’ advice. Indeed, having an advisor serve as a sounding board can be highly valuable. That is, simply listening to clients talk about their savings goals and concerns can help investors better focus on their priorities.

In the process, clients can better understand what challenges they may have to becoming financially secure and what issues they must address promptly.

Advisors should also be prepared to provide more concrete scenarios that illustrate the value of financial advice. One powerful example is recommending that clients’ have sufficient long-term disability insurance. Investors, broadly speaking, tend to turn to advisors for hot performing investing. Yet, the loss of income that can occur when individuals become disabled can make gains from even the strongest performing investments seem minimal. Not only will income be lost, but in most cases, disabled individuals will see their expenses increase as they have to hire home health aides or other assistants.

The loss of income can be replaced in large part by disability insurance. Advisors can also point out that their personal relationships with clients puts them in position to ensure that other aspects of financial plans are in order, such as declaring beneficiaries for IRA accounts, retirement plans, and brokerage accounts.

A personal advisor can check on those functions and also help clients assess which relatives or friends should be listed as beneficiaries. There are many other aspects of the financial planning process, of course, that are best handled with a personal relationship.

Needless to say, each advisor will have a specific sales pitch for competing with robo-advisors. After all, advisors have different strengths and different areas of expertise. With that in mind, one value of robo-advisors—or other forms of competition—is that they force advisors to assess their own strengths and customize their marketing efforts.

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