Robo-Advisors are Squeezing Stock Brokers & Retail Advisors By: Gabriel PotterMBA, AIFA® 2015.03.09
Chris, a struggling salesman in the early 1980’s, sees a well-dressed professional park a beautiful, red Ferrari in the financial district of San Francisco.

Chris:  “Man, I’ve got two questions for you:  what do you do and how do you do it?”

Ferrari owner:  (points at the nearby bank) “I’m a stock broker.”

Chris:  “Stock broker!  You had to go to college to be a stock broker, huh?”

Ferrari owner:  “You don’t have to.  You have to be good with numbers and good with people.  That’s it!”

Chris:  “I still remember that moment.  They all looked so damned happy to me.  Why couldn’t I look like that?"

Chris looks at the other brokers and professionals streaming out of the bank .

Scene from the movie, The Pursuit of Happiness.

Since the industrial revolution, automation has been a key aspect of increased productivity.  You can boil down the industrial revolution into an essential idea:  it is now possible to replace expensive manual labor with cheap specialized machines.  Blue Collar workers have been struggling with automation ever since.  The early changes were sweeping and obvious, with vast swathes of the labor force eliminated by automation.  Now, the last remaining vestiges of basic labor jobs – checkout clerk, fast-food cook, truck-driver – could be decimated in the next decade due to automatic checkout scanners, robotic fry cooks (Yes, Really!), and self-driving vehicles.

Until the 1990s, White Collar jobs which depend on information and services, rather than transfer or processing of physical goods, have been relatively immune (or simply made more productive) from this shift.  However, the inter-connectivity of access and proliferation of information has advanced the ongoing information revolution to a familiar idea:  it is now possible to replace basic decision making and information services with software.  For example, travel agents  have to compete for simple online bookings for flights, hotel, and auto rentals.   It’s still an important job for travelers with complicated itineraries, but basic services are simply and cheaply fulfilled online.  Another example:  attorneys will always be necessary to conduct complicated or combative engagements, but some very basic services can accomplished with a download from  Tax accountants will always be necessary to manage the unique and complicated needs high-net worth estates and corporations, however a large number of households may be perfectly satisfied with an inexpensive automated service like TurboTax or H&R Block online. 

Why are we discussing this shift in labor and service?   Simple.  This shift towards automation is now occurring in the investment advisory space.  So called “Robo-Advisor”  firms offer online tools to manage a basic, efficient investment portfolios with modest costs. 

There is, unsurprisingly, a fair amount of alarm from complacent retail advisors who have been surprised by this threat in the competitive environment.  Retail financial advisors cannot count on having exclusive access to the financial markets or planning tools, so they may maintain good relationships and compete on service.  For example, they could offer  themselves as a source of financial coaching or discipline, like a personal financial trainer.  Alternatively, advisors may try to tackle more complicated projects to defend their revenue stream, but they may fall short without the prerequisite expertise and a dedicated focus on the institutional marketplace.  Other retail advisors have tried to adopt business practices closer to the institutionally key fiduciary standard, but their operations are often incompatible with the standard’s onerous requirements.  To wit, the Obama administration has recently made waves for the wirehouses and retail brokers by endorsing the Department of Labor’s fiduciary standard for anyone who deals with retirement assets.  The proposed regulations have been characterized as a “sledgehammer” on existing broker relationships, with potentially “punitive” consequences.

The reputation of the financial industry took a shock during the financial crisis and now it appears that a seemingly undemanding, lucrative career path has finally run out for many advisors.  Cerulli Associates reports the number of financial advisors has fallen for five years in a row.  The downturn is likely to continue since the value proposition for basic retail services is only going to get harder.  There is clearly a need for focused financial professionals, especially those who meet the fiduciary standard, which is clearly advancing for institutional or retirement services.  However, the allure of easy money, simply being a stock broker, is gone. 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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