Running a Financial Advisory Practice in the Age of the Robo-Advisor

Here’s a novel idea: Advisors might actually need to earn their advisory fees in the years ahead.  With the arrival of online financial planning sites like and robo-advisors like Covestor, which allow an investor to mimic the trades of a portfolio manager, a real in-the-flesh advisor has to offer something more than generic, packaged advice if they are to convince a skeptical investing public to pay them.

While this might feel threatening to some advisors, it shouldn’t. Yes, the rise of the robos commoditizes entry-level financial planning.  But it also allows advisors to scale their practices and to focus their energies on higher-valued services.  Used correctly, robo-platforms can be also used alongside social media and traditional news media as a powerful marketing tool.

The Flattening of an Industry

The internet has flattened industry after industry over the past twenty years as technology has eliminated traditional gatekeepers.  First, Napster and its successors destroyed the economics of the music business, leaving Apple and iTunes to pick up the pieces with an entirely new business model. Then disrupted the business of bookselling twice—first by cutting out the traditional brick-and-mortar book store with home delivery and second by eliminating the paper book altogether via the Kindle. Netflix is in the process of revolutionizing TV and movie distribution.

Today, the financial services industry is undergoing a revolution of its own.  Discount online brokerage houses continue to replace traditional full-service brokerage houses, and the wide availability of free or inexpensive high-quality investment research has made brokerage research—ostensibly what you are paying for from a full-service brokerage house—far less valuable. The decline of the traditional broker-dealer transaction-based model has led to the rise of the RIA advisory-based model.  And now, even this model is being transformed by automated “bots” that handle basic planning and portfolio management.

Building a Robo-Proof Practice

Rather than fight the rise of the machines, I embrace it.  I run several of my investment models on the Covestor platform and make my trades and performance available for the world to see.  Some might say that I’m giving away the secret sauce—and indeed, an investor could essentially piggyback on my trades for free or with only a very minimal investment.

Guess what?  I’m counting on it.

The most important elements in building a client-advisor relationship are trust and credibility.  By posting my portfolios online—and by posting regular commentary on my blog and via social media—I help to establish both while building name recognition.  A potential client can get to know me by reading my work and by following my models with only a modest portion of their portfolio.  They can follow me anonymously, which is an attractive selling point to a generation of investors that has grown desensitized to sales pitches, marketing letters and cold calls.  When you produce quality content, the readers find you; you don’t have to pound the pavement looking for them.

The internet has spawned the “freemium” model in which a consumer gets to try a basic, scaled-down version of a product in the hopes that they will upgrade to a higher-end paid version.  It may seem discouraging to an advisor to give so much of their intellectual capital away for free in the hopes that a follower might pick up the phone and call. But if you provide value, the clients will follow.  It’s a long game that requires consistency and commitment.  But it works.

There are other practical reasons to embrace a robo platform.   Sometimes, it is impractical to take on smaller clients, no matter how much you might want to.  Each additional client involves fiduciary responsibility and a sea of compliance paperwork.  If time is money, taking on smaller clients can actually be a money-losing proposition.  This is an area where robo-advisors are a godsend.  If a prospect with a modest account size comes to me for help, I can refer them to one of my Covestor models rather than turning them away.  They get substantially the same portfolio management, and I avoid the time-consuming back-office headaches.

Going Upscale

Finally, I want to highlight a major opportunity that robo-advisors offer to in-the-flesh advisors.  By effectively outsourcing much of the compliance and back office responsibility, it allows the advisor to leverage their time and focus on the higher-valued-added aspects of building a wealth management practice.  Every minute not spent in dealing with new account paperwork and routine trading is a minute you can spend being more responsive to your clients, whether that means meeting them face to face or simply looking for better investment opportunities on their behalf.

This article first appeared in Investment News.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.