robo-advisors-to-take-over-the-worldIf you have seen a zombie movie, you know that regular humans are not prepared for the zombies when they attack.  That is because the masses are unaware of what is happening early on. They only see the late stage when the zombies are threatening to wipe out the entire human race.

Just in time for Halloween, Dan Egan, director of behavioral finance at Betterment, spoke of zombies to prove a point. Right now the industry is not seeing the robo advisors’ client growth as a threat.

“You have to keep in mind zombies. People are not really good at estimating compound growth. The day before the population is one hundred percent zombies it was at fifty percent zombies.  It is going to sneak up on you,” said Egan.

Egan spoke at a breakout session at LIMRA’s annual conference in Boston, Mass. He was joined by a facilitator, Eric Sondergeld, corporate vice president of strategic and technology research for LIMRA.

Who Robos Focus On
“We have a blue ocean of consumers in front of us. People that have never had financial advice ever offered to them,”said Egan.

Betterment and other robo advisors are trying to create a better online customer interface to catch the wave of clients that are comfortable with the commoditization of investment management. There are four criteria in this target market. They have to be:
1.  Comfortable online. 
The good news for robo advisors is that those that are not comfortable online are dying off. Literally, Betterment is seeing some of their best clients coming from inherited IRAs.

They are even seeing sixty percent of logins come from mobile devices.

2. OK with passive investments.
Betterment, like most robo advisors, does not have its own funds. They mainly use ETFs and Vanguard funds represent their largest offering.

3.  Cost conscious.
Betterment’s thirty basis points (and lower for larger clients) is a lot more appealing to this type of person than one hundred basis points or more offered by most traditional advisors.

4. Tax conscious.
Betterment actually has messages when some clients try to do a trade to help educate the client of the tax consequences of making a trade. Egan thought showing the negative side of a trade is something that is rare in the industry.

So the standard idea that the robo advisors are aiming for younger clients is not accurate. While Betterment’s average client age is in the mid-thirties range, they are not limiting themselves to just younger investors.

One interesting difference, relative to other areas of the industry, Betterment has a larger ratio of female customers, although they are still the minority.

The balances are still smaller than the traditional advisors, with an average size of $24,000 and their customers are only holding between twenty and fifty percent of their portfolios with Betterment.

In a follow-up question, Egan stated that he believes their target market represents about $25 trillion.

What Might Help Robos
robo advisorWith the increasingly prevalence of 401(k) plans, retirement investing is being left up to the investor.Egan said it was a “tremendous opportunity.”  That is because there are a large number of assets are associated with those left ot fend for themselves. Egan added that they are “probably not doing it optimally.”

A big part of the robo advisor strategy is to democratize investing. Without having large minimums that their competitors require, they are able to start clients at much smaller balances and create goals for things like retirement or emergency funds.  The service then provides time horizons and messages if their clients go off track.

Still, awareness for robo advisors is low. Sondergeld pointed out that LIMRA research shows that eight out of ten investors are unaware of robo advisors.  However, one focus group LIMRA recently did showed that getting picked up by the national media, like NPR, might make a difference.

Betterment is starting to advertise in a different way too, which will be very data driven.  Egan said he saw his company logo on cabs on the walk over to the conference.

It is not just PR, advertising and referrals that are driving business.  “Thirty to forty percent of our customers drop out of the sky. They literally come out of nowhere,” stated Egan.

Egan pointed out that they can also team up with advisors.  “We have horizontally shifted our platform. Advisors tend to do higher-end financial planning.  We are a turnkey asset management program running in the background,” noted Egan.

He went on to say, “The Betterment institutional tool is geared for advisors.” He gave the XY Planning Network as an example where fee-only financial planners that are not compensated by asset management fees use Betterment and stick to doing the financial planning.

Lectura recomendada:  The benefits of Personal Financial Planning

It Is Good To Rock The Boat
William Taylor, co-founder of Fast Company, gave a keynote that spoke to the over 500 attendees at the LIMRA annual conference earlier in the morning.  His observations over the twenty years of his organization were somewhat related to the potential zombie-like uprising of investors that the robo advisors might benefit from.

“The most successful companies do not try to compete. They embrace one-of-a-kind thinking” said Taylor.

When it comes to innovation, Taylor urged attendees to avoid letting what they know limit what will come at them. Too often the outsiders are the ones that are the disrupters and the incumbents are the ones that end up playing catch up. “Keep your minds open to new possibilities,” he advised.

While too many are worried about sinking the boat, they end up missing the boat. Instead they should be rocking the boat, because there is a risk of just doing the same thing.

It will be interesting to see if the robo advisors, like Betterment, rock the industry boat and bring about a widely accepted way of serving investors. In the meantime, watch out for zombies!


Mike Byrnes is a national speaker and owner of Byrnes Consulting, LLC. His firm provides consulting services to help advisors become even more successful. Need help with business planning, marketing strategy, business development, client service and management effectiveness? Read more at ByrnesConsulting.com and follow @ByrnesConsultin.