For over 19 years, Alex has been dedicated to assisting his clients in working towards their financial goals. He has served as a financial consultant to many successful professionals, business owners, and retirees.
In this interview, Alex shares his views on the future for financial advisors depending on whether they take advantage of using robo-advisors; what types of robo-advising platforms may be most useful for his practice, and what he expects to see during the next few years.
Q: How did you come to the wealth management industry?
Alex: I started in the industry in ’97, so about 20 years ago. In college, I was initially studying to be an accountant. A partner I was working with at an accounting firm was telling me, “Instead of focusing on accounting, you should probably look more into financial planning,” because I had a knack for stocks, mutual funds, and investments. We would get together and look at the Wall Street Journal and analyze some different investment options.
He pushed me more in that direction. I didn’t really think much of it at the time, but then, as I continued in college, I realized that accounting wasn’t my passion. I was passionate about investments, passionate about managing money. I was doing it for free for my friends, family members. I figured, if I can get a career doing something that I really enjoy, I think that’s a good way to go.
I got the opportunity to get licensed in the industry. I was 21 at the time, so I figured, “I’m young. I don’t have a wife. I don’t have kids. I don’t have a house payment. I don’t have any of these things so I might as well try it while I can. If I do well, great. If I fail, I’m sure mom and dad will take me back home. I have nothing to lose.”
I started in ’97, working with friends, family members—and just grew the firm from there. Here we are 20 years later.
“We’re utilizing and looking at robo-advisors as a way of being able to bring scalability to our practice.”
Q: What changes, if any, have you observed in the wealth management industry in recent years?
Alex: I think in the last three to five years, I’ve noticed some massive changes in the industry. Obviously, technology has ramped up and is growing at a faster and faster rate, so utilizing technology in your business is great. One of the things I realized early on was that, as much as we have that vision in our head, from 20 years ago, being able to have a laptop sitting at the beach, running your business where you get to say, “Oh, with the use of technology, we can have much more time because of the increased efficiency,” now I feel like it’s the opposite: we’re taking on 10 times the amount of work because of the technology we’re using. I get bombarded with emails, messages, so on and so forth. There’s just so much information coming in that it’s made things a lot more difficult for the solo practitioner. You have to work more on a team basis and have other staff members as well as other resources that can help you to do a good job for your clients.
Q: Do you think it’s a bit frustrating to have more and more information because of the technology?
Alex: It’s a double-edged sword. Having more technology and having more information makes you a better investor and gives you more information to make investment decisions. But sometimes it’s overkill, where you’re getting so much information there is no way to swallow it. You have to try to take in as much as you can or figure out good ways of filtering that data, and then use data that actually works to your advantage or helps you reach your financial goals.
Q: How do you think investors, both retail investors and B2B investors, can benefit from using Robo-advisors? What are the main benefits to using robo-advisors?
Alex: A lot of my colleagues either fear robo-advisors and think that it’s going to kill the industry to an extent, or are pretty naïve, thinking, “Oh, that’s not going to affect me or my practice.”
I think those are the two extremes. What I see happening in the near future, is something more in the middle. You can do one of two things: (a) ignore it and just see how the future goes, while you ride things out; or (b) embrace the technology and try to use it to the advantage of your practice.
We’re utilizing and looking at robo-advisors as a way of being able to bring scalability to our practice. Whether we want to use it for some of our clients, maybe the smaller clients, where we don’t want to be doing a lot of the trading and it’s not worthwhile for us to do that. Or we use it for all of our clients, and then marry that with the human aspect of financial advice and guidance, to create a hybrid solution. I think that’s where our firm, at least, is heading. More towards creating a hybrid solution and using the technology for most of our clients.
I think there’s some great aspects to it. But with regard to the B2C aspect, where Betterment, WealthFront, or some of these guys are going directly to clients, you can see that leading to issues down the line. All we need is a big market downturn, and a lot of those people might get hurt or wiped out. And then all of a sudden, they’re going to say, “Oh, maybe I need someone to guide me and hold my hand.” Because ultimately that is what we do as advisers. We’re here to make sure that the clients feel comfortable with the risk they’re taking. If they’re not, we adjust the risk, and we have to talk them through and explain why maybe the investments that we put them in are fundamentally still good and they should stay the course.
It’s a little bit different when you’re dealing with a robo solution, where you’re talking maybe to an email address or you’re calling an 800 number. They can’t really make any investment decisions for you. I know that some of these robo-advisors are starting to get a little bit smarter on that front, and Betterment is rolling out a situation where they have CFPs on staff, and they can give you a little bit more guidance. But remember that this person is probably dealing with thousands of clients and doesn’t really know your individual situation that well, and is not going to be able to build a good relationship with you.
I think the future for us is going to be where we can try to find a hybrid solution in which we utilize the technology to our advantage, but still offer the human touch.
“A lot of young people don’t trust Wall Street, they don’t trust the markets, yet they trust an app on their phone.”
Q: Do you think that B2C can replace B2B solutions totally?
Alex: To an extent, I think they will. Again, going back to what I mentioned earlier, we’ve been in the bull market for the past nine years. Everything looks good. Investors that started five years ago have done well and have not experienced a major pullback. Today, for example, we have the Dow that’s down 250 points. Will that shock some of these investors? Maybe, maybe not, but if we have a market that starts to slide down and they are down, 10, 15, 20%, you’re going to see a lot of those B2C clients possibly get scared, want to make changes, or decide to close out their accounts.
We recently had a short-term downturn in the markets and Betterment didn’t allow their clients to make withdrawals from their accounts. They put a stop to it. They got a little bit of flack for that, but ultimately when the markets recovered, their clients were happy they didn’t sell. So, it will be interesting to see how much control these robo-advisors are allowed, because if I was a client and I really needed my money, regardless of what was going on in the markets I might not have been too happy about the fact that they’d locked my account and were not letting me make a withdrawal.
Betterment has realized that they do need to work with advisors; that’s why they came up with the B2B solution of “Betterment for Advisors,” which was called “Betterment Institutional” before, which they’re offering to advisors in order to offer that solution to clients. But they’ve shot themselves in the foot right now—they offered that to the advisors, and then they turned around and just recently launched a version where they can go direct to the client and offer a financial advisor for fifteen basis points more, or twenty basis points more. So now they’re directly competing with the advisor in that regard, so I don’t know how that’s going to work.
If I was utilizing Betterment as an advisor I wouldn’t be too happy about that, but that’s just me.
Q: Do you think that people have been starting to invest at earlier ages during recent years? If so, why do you think this is happening? Can technology companies improve the investment culture among the younger generation?
Alex: I like the fact that investors are getting in at a younger age. They should definitely utilize compounding interest to their advantage. An investor that starts at 20 has an immense advantage over an investor that starts at 30, and an even bigger advantage over an investor that starts saving towards retirement at 40.
Utilizing these tools and the technologies are great; one of the roles they play is possibly educating their clients about compound interest and about how to utilize the market. But a lot of young people don’t trust Wall Street, they don’t trust the markets, yet they trust an app on their phone. It’s mind boggling to me that due to the way our society has changed its thinking, security for them is not as much of a concern when it comes to technology and so forth. Yet when it comes to other things it’s a huge concern for them.
So I don’t know if that really answers your question, but I mean our society has changed and young people have adapted to use the technology and to be able to use robo-solutions. So I think for us as advisors, offering them these tools and technology is great. One of the things that I heard was that an advisor not having a robo-solution is kind of like a bank not having an ATM. A lot of people like to go inside the bank and utilize the tellers, but then there’s a lot of younger people who just prefer going to the ATM and using that day in, day out. So if you don’t offer that solution I think you’re missing something.
Q: Do you use any kind of robo-advising software in your practice right now?
Alex: We’re actually doing due diligence on a couple of different robo-solutions, one of which is called Autopilot. Autopilot is provided by Riskalyze. That’s one of my favorite options.
LPL Financial also offers a great solution, called GWP (Guided Wealth Portfolios). It uses FutureAdvisor’s robo-solution in the background. We’ve looked at Betterment as well. But I would say the options we will utilize in the next six months for our practice would be either the Autopilot solution or GWP.
“I think in the next five to 10 years, you might see half as many advisors out there.”
Q: What do you think about the competition between WealthTech companies, software companies, and investment banks, who are trying to apply in technology for wealth management?
Alex: Right now robo-solutions have gained traction, but still they’re still very small compared to the traditional institutions. Compare the biggest one, which is Betterment, to J.P. Morgan or something of that nature. J.P. Morgan might be looking at this and thinking “Okay, should we be worried about this?” Size-wise, no; but the technology catches us, so I think one of two things is going to happen. Either these institutions are going to wake up and say “Okay, we need to either create something like this internally, so we can utilize it for our clients,” or they’re going to go out and acquire a FinTech company or an existing robo-solution, similar to what BlackRock did with FutureAdvisor. And I honestly think some of these robo-solutions are looking to get acquired. I think the end goal for some of them is to roll over into one of these institutions.
But definitely the mutual fund landscape is changing completely. You can see over the last year, inflows into mutual fund companies have died; we’re seeing more of the money going toward ETFs. Now is that because of robo-solutions, or because of the industry changing, or both? Ultimately, you’re going to start to see a lot of consolidation in the financial world, and eventually you’re going to see less and less of these types of institutions, but they’re going to need to ramp up their technology and its use—whether it be robo-solutions or other things they create internally—to grow or maintain their existing assets.
Q: Do you think there is any risk that more conservative advisors will not be able to compete with the younger startupers who have both financial expertise and an understanding of the technologies?
Alex: I definitely think there’s a risk. I’ve been talking to a lot of advisors that are less apt to take on new technology and adapt some of these new features that are out there. They’re going to have a lot of headwind out there, whether (a) it’s going to be harder for them to grow scalable relationships, as there’s only so many you can take on as a financial advisor, or (b) as their clients, who are not necessarily comfortable with the technology right now, pass away and transfer the assets to the next generation, which wants to have access to the newest technology.
If those advisors don’t have that technology to offer to the next generation, or have not built that bridge, they’re going to lose those clients. And they’re going to lose those assets. The clients are going to go somewhere else, whether it’s to a robo-solution or an advisor like myself, who is using technology as part of our solutions.
We’re going to see a big shift and a lot of advisors will slowly get out of the industry. Not only because of what’s happening with the technology and the fact they don’t want to adapt to it, which might mean they are pushed out of it, but also because regulations and other items are changing in our industry. I think in the next five to 10 years, you might see half as many advisors out there—they might have to scale up and join other firms, or they might decide to just call it quits.
I would compare this to the travel agency industry. When’s the last time you talked to a travel agent? You probably go online, whether you use Expedia, Travelocity, or one of those, and book your hotel and your flights that way, and you’re comfortable doing that. There are still some travel agents out there who had sufficient scale and size to be able to outlast the storm, but you don’t see a lot of them anymore.
One of the things that we’re doing is trying to grow and trying to scale up so we can keep up with all the changes in our industry. Because of fee compression, you’re going to see a lot of these advisors making half or a third of what they were making. They’re having to slowly bring their fees down or clients are walking out the door and going somewhere else. And in this race to zero with FinTech and robos it’s making it harder for advisors to make the same type of living that they used to.
Q: What features of robo-advisors are most useful to you as financial advisors?
Alex: Ultimately, we want to do what’s best for our clients. I want to make sure the solution we offer is the best thing for the clients. So some of the main features we’re looking at is how they’re devising their portfolios, how they’re coming up with their risk algorithms, the user interface, what functionality they have, what things the client can do on their own instead of having to utilize an advisor. For example, if the client needs to take out $5,000, is that something they can do directly through the robo-advisor, or does the advisor still have to make sure that the client can handle those types of distributions and service items? Functionality, an interface that’s very user friendly, is important, and then ultimately it comes down to the risk analysis.
One of the reasons I like the Autopilot solution is that it has a built in risk tool, which we currently use from Riskalyze. The technology is very seamless because it goes through all the stages. When the client conducts a risk analysis, it’ll devise a recommended portfolio based on that risk number, and then it’ll help them establish the account, using e-signatures, and handles everything from A to Z. So having that type of turnkey solution is great; some of the other solutions don’t offer everything A to Z, or they’re missing specific components that are important to me. So that’s kind of what we’re looking for.
Q: You have a questionnaire, and based on the answers the solution calculates the risk tolerance for the current user. Do you think that we should have a more complex way of calculating risk tolerance? In your opinion, what kinds of algorithms and so on should we use and implement in robo-advisors for risk-tolerance calculations?
Alex: Unfortunately, when it comes to money, decisions are made emotionally, and that is one of the things that a lot of the risk questionnaires, I’ve seen in the past, don’t take into consideration. And they’ll ask random questions where I have clients look at me and ask “What does this have to do with my account?”. Obviously, they all have different ways of trying to figure out where the client should be. For example, the old questionnaires would ask certain types of questions, you’d calculate points, and then based on the points you would say “you’re a moderate investor” or “you’re a conservative investor.”
Now, utilizing Riskalyze, the questionnaire will ask you how much money the client has to invest in the portfolio. Let’s say it’s a million dollars, so you put in the million dollars and it starts asking questions. And the good thing about Riskalyze’s analysis is that you not only see percentages, but also actual dollar amounts. So the client will say “I’m comfortable with 20% risk on the downside,” but then you ask them, “You’re okay with losing $200,000 in the next six months?” “Oh no, I don’t want to lose $200,000, that’s a lot of money, that’s my hard-earned money.” So then you’re not comfortable with the 20% loss.
I don’t know why there’s a disconnect, sometimes, in clients’ heads in percentages and dollars, but putting it in front of them makes it easier. And then, once you go through the analysis in different steps, it will actually come up with their Risk Number. So in that way it’s not a conservative investor, or a moderate investor, or an aggressive investor—it’ll actually give them a number, and it’s on a scale of 1–99. So let’s say they come back after their analysis and their Risk Number is a 60. I’ll look at that as their portfolio’s speed limit. And I’ll tell them “This is the speed limit you’re telling us we can go, and we’ll build a portfolio that has a similar risk tolerance and is going to have a range of negative this to positive that over the next six months. As long as we’re within that range, we’re on track. We don’t need to make any changes within the portfolio.”
I think that conversation is a lot different, and the clients actually like to see the number. It’s a lot more concrete than something like “you’re a moderate investor.” Because what’s a moderate investor to you is different than what’s a moderate investor to me. So it’s open to interpretation and we don’t want to do that when it comes to investments and people’s money.
“I’m hoping that in the next five years you’re going to see so many advancements that it’s going to be hard to choose which FinTech product to utilize.”
Q: There are two kinds of people in the area: financial advisors, business people on one side, and software developers, software engineers on the other. Is it important for business to have a deep understanding of the technological side of the business, and vice versa?
Alex: I think they both need to know more about what’s happening on the other end of the spectrum. Maybe software engineers don’t need to know what’s going on with capital markets as much, but if they’re devising a financial planning tool, or some other FinTech product, they need to understand how an advisor would use that on a day-to-day basis with their clients. I’ve seen multiple platforms within FinTech that are great, and might be breakthroughs as far as what the software engineer thinks, but that’s not something we can apply in our practice or use for the common client. It’s not something that makes sense. Another example: if they design a product in such a way that it doesn’t really work well in a typical office environment, how would you use it in a review meeting, or an initial consultation with a client?
I think it’s very important that the two merge and learn more about how to do it. Because writing a line of code is one thing, but how do you use that code in practice?
Q: What would you recommend for software engineers to get more knowledge? Such as books, online courses…?
Alex: I don’t know that reading books is going to help as much as trying to shadow an advisor or a consultant for a day or two to get an idea of what their day looks like, what they’re doing, how they run their practice, how they run their meetings. It depends on what kind of software you’re writing. If you’re developing financial-planning software, you want to work with a firm that conducts a lot of financial planning and find out what their key areas are and how they use the software. What their pain points are with some of the existing software they use. They might say, “I like the software, it does this, this, and this, but it doesn’t do this. And that’s something that I wish we could do.” And that way the engineer could say, “let’s figure that out.” Or you could look at a lot of financial planning software that’s already out there, and try to make it more user friendly for the advisor and the client.
One of the financial planning tools that we like is called Advizr, and it’s very user friendly for the client and the advisor. It has great user interface and awesome planning tools. Before, we used to print out a 100-page financial plan to give to the client, and now we don’t have to do that. We set up the monitor to show the specific goals we are going to help them with and have a conversation during the meeting. They see what’s going on, and realize that it’s a living, breathing financial plan.
That’s something that Advizr developed by sitting down with an advisor, that actually uses financial planning throughout their practice, and worked out the kinks of their software. What they had originally started with, looks nothing like it does now.
Q: Which of the WealthTech companies would you highlight as the biggest innovators right now in the industry?
Alex: The two that we talked about. One is Riskalyze, they’ve definitely changed the way that risk analysis is done. It’s a game changer for our practice. We’ve been using it for our existing clients, as well as for the acquisitions that we’ve done. We’ve had multiple acquisitions over the course of the last couple of years. That’s been a great tool for us to bring clients on and find out what their actual risk tolerance is. Because a lot of these clients did their risk tolerance questionnaires, if at all, 20 years ago, and lots has changed since then. So using this tool has been a fantastic way of finding out where they need to be and then using that Risk Number to decide which one of our models or portfolios is appropriate for them.
The other innovator in the WealthTech industry is Advizr, which is a financial planning tool. The good thing about Advizr is that they work more on a goals-based plan, as opposed to the traditional cashflow-based plans that a lot of the other financial planning tools use now. So goals-based planning is a little easier for the client to comprehend, and get an idea of “this is the goal I’m trying to accomplish and this is what I need to do to get there”. The software is beautifully built, which makes it easy for a client to navigate through. The clients that recently started to use the software, have enjoyed the experience.
Q: Would you share your vision of the future of the wealth management industry, and what the typical company in WealthTech will look like in five years or so?
Alex: I’m hoping that in the next five years you’re going to see so many advancements that it’s going to be hard to choose which FinTech product to utilize. Right now, I would like to have a solution that offers four or five different key areas. What I’m finding is that a lot of these programs have maybe three out of the five, or possibly four out of the five, items that I’m looking for. They are not the complete A-to-Z solution. They’re working on it, they’re trying to figure it out, be it through APIs and other ways of integrating with other software. If they could do that integration as a full integration, and not just, “I could send an email address across from one software to another,” but offer a whole, robust solution, that would be great.
And we’re heading in that direction, it’s just going to take a couple of years before that’s done. But once we have that, the advisors that adopt that technology and bring it into their practice are going to be lightyears ahead of those that don’t. And unfortunately for some older advisors, who may be closer to retirement and don’t want to adopt any new technology, they’re either going to slowly lose clients or they’re going to decide to exit the business. Sooner or later, these advisors are going to realize that if they stay, their practice is going to be worthless through attrition, unless they decide to sell in the near future.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.