Thriving in a Brave New Robo Advisor World






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for Advisors Who Lead the Way

Thriving in a Brave New Robo Advisor World

Robo advisors are gaining traction, with the largest startup companies rapidly approaching $3 billion in assets under management and many more on their way.1 The wealth management industry has yet to determine how online financial services engines will affect the in-person standard advice model.

The Robo Advisor Threat

Robo advisors (RA) are online platforms for investment advice, but the precise definition of the term is under dispute, especially as the market matures and expands into new niches.

Some only include “eRIAs” under the robo advisor term, and some give a slightly broader definition that includes firms offering planning services. We define robo advice under four main service segments. An RA may offer one or more of these services and can be independent or owned by another larger asset manager or wealth manager.

Robo Advisor Segments

Investment platforms with predetermined portfolios. Examples: Betterment, Wealthfront, FutureAdvisor

Self-directed, customizable investment platforms. Examples: Motif Investing, Folio Investing

Online advice providers, with human advisors serving clients. Examples: LearnVest, Personal Capital

Personal finance dashboards or account aggregators. Examples: eMoney, Mint

Addressing the Threat

RAs and the move toward interaction-free advice, specifically among the next generation of investors, has many advisors concerned about asset attrition and margin crunch. Advisors and RAs are

competing on three different service fronts.

Cost includes the actual amount of the cost and the fairness and transparency of the cost. Financial advisors generally charge higher fees than RAs, but because they often provide more offerings, these fees are justified by a higher level of service. Convenience refers to the ease with which clients are able to engage with the services offered and the peace of mind they feel because of them. Quality refers to the total suite of services offered and how well those services help the investor. The tables on the next page expand on these three points of competition and lists the competitive advantages RAs claim.

Second Quarter 2016


Robo Advisor Value Propositions

Cost Convenience Quality

Points of Competition

▪Total cost

▪Value for fee

▪Fee justification

▪Ease and efficiency of service

▪Time investment

▪Peace of mind

▪ Reliability of service

▪ Holistic nature of advice

▪ Benefits of advice

RA Competitive Advantages

▪Low AUM fees

▪Fee transparency

▪Low/no commissions

▪Online account management

▪Flexible time management ▪▪ Software integrationTax alpha

Source: Nuveen Investments.

RAs generally compete by commoditizing or automating services previously performed on an individual basis, such as rebalancing or tax loss harvesting. By matching value points RAs have commoditized, and building skills that create value differentiation, advisors can compete with RAs on all three service fronts.

Battling the Robo Advisors: Human vs. Machine

Cost Convenience Quality

Commoditized Value ▪Communicating Fees ▪Technology and Security ▪ Tax Efficiency

Value Differentiators ▪Behavior Management ▪Diverse Investment Availability ▪ Tax, Retirement and

Estate Planning Source: Nuveen Investments.

Meeting Robo Advisors’ Commoditized Value

Financial advisors can challenge the advantages touted by robo advisors (RAs) in the areas of lower fees, more efficient technology and tax efficiency. Here are thoughts on addressing these features.

Communicating Fees

RAs bravely plaster their fees on their marketing materials, and for good reason. Fees are often well under 1% of assets under management, reaching a bottom floor of 0%.

Transparency and effective communication of the value of your professional advice, not matching fees, are key to battling the margin pressure from RAs. Advisors offer a different service than the average RA, which means their fees are not necessarily comparable. Advisors need to be able to articulate a concise and convincing value proposition, which explains the services the fee purchases and how those services will benefit the client. How can advisors do this?

▪Don’t hide from the fees. Be upfront, forthcoming and understanding. Avoid becoming overly defensive, and instead position yourself as a resource to help the client understand how fees are charged in the financial services industry. Conversations are more constructive to relationship-building than arguments.

▪Put the fees in context. This step may involve educating the client on common fee levels and structures in the industry or explaining any discounts applied to his or her account. ▪Be clear on how fees or commissions are determined.

Hidden fees and incentives are a common client concern. If they are not being charged, take the time to put this concern to rest. The financial services industry can appear intimidating and opaque to clients. Communication, clarity and counsel are the key.

Explain benefits versus costs of services. There are costs

associated with any service; help the client to understand the benefits and ensure that they outweigh the costs in the client’s mind.


Technology and Security

Technology is at the heart of the RA competitive landscape, and advisors should examine their practices to ensure they are maximizing software efficiencies. RAs primarily use algorithms, meaning investment decisions and portfolio management are highly, if not completely, process-driven. Benefits of this type of administration are efficiency, accuracy and often cost reduction. Drawbacks are lack of personalization options and inflexibility for changing circumstances.

Dependence on technology prompts questions about information security for many investors. In fact, more people are afraid of being hacked than being mugged.2 Advisors can

invest in firewalls and other protections and institute security policies for employees to minimize security breaches, such as requiring employees to lock all doors and file cabinets and log off their computers before leaving the office.

Identity theft has topped the Federal Trade Commission’s annual list of consumer complaints for the past 14 years, representing 14% of all complaints in 2013, and the personal and financial impact is considerable. Below is a list of steps advisors can encourage their clients to take in order to lower the chances of becoming an identity theft victim:

Request a free copy of your credit report (

Do not carry a checkbook or your Social Security number.

Only carry credit cards you need and will use.

Review activity statements for all accounts when you receive

them. Monitor online banking activities weekly.

Set up account alerts and place passwords on credit cards

and other accounts that allow for such protection.

Do not give out personal or financial information unless you

initiate a phone call. Always confirm the source of an email request for information and respond by initiating a separate contact with the business.

Do not list personal identifiers on social media sites, such as

mother’s maiden name, pet’s name, city of birth, etc.

Do not give out your Social Security number or other

personal information unless absolutely necessary. When a Social Security number is requested always ask: Why is this needed? How will this information be secured? Can a

2 Gallup, October 2014.

different means of identification be used? What will happen if I do not provide my Social Security number?

Secure personal information at your home. The incidence

of identity theft by those who know the victim makes this very important.

Tax Efficiency

Many RAs claim to offer tax-related alpha, such as investment in passive vehicles and loss harvesting. Advisors are also able to offer these tax benefits and can offer broader context.

Tax loss harvesting provides advantages for investors of every wealth level. Investment losses can be used, dollar for dollar, to offset realized gains and up to $3,000 of earned income. Any unused losses can be carried forward indefinitely. When a loss is carried forward it retains its character of “long-term” or “short-term,” meaning losses carried forward to the next tax year are used first to reduce long or short-term gains.

One limit on loss harvesting is the wash-sale rule, which prohibits the purchase of a specific security within 30 days prior to or after the date at which the same security is sold for a loss.

Another important aspect of tax efficiency is asset location. The vehicle in which the assets are held can be as important as which assets are owned. Assets that produce repeated taxable events should generally be held in tax-advantaged or tax-exempt (Roth) accounts, and assets that do not produce as many taxable events are best held in taxable accounts. ▪

Tax-Deferred vs. Tax-Exempt Accounts

Tax-Deferred Accounts (Traditional IRA)

Investments with Lower Expected Return

Tax-Exempt Accounts (Roth IRA)

Investments with Higher Expected Return




▪ Large Cap

▪ Core Strategy ▪▪ Small CapInternational

Taxable Income

▪ Investment Grade Corporate Debt

▪ Government Bonds ▪▪ High Yield Corporate DebtREITs Source: Nuveen Investments


Creating Value Through Differentiation

How do RAs stack up in areas that cannot be automated? Investment and planning services set advisors apart from robo advisors (RAs) by taking a holistic approach to the client’s wellbeing. The quality of service and advice an advisor provides is usually inherently higher than an RA, because the advisor is taking into consideration a more complete account of an investor’s financial situation.

Behavior Management

RA skeptics often ask, “Will investors make rash investing decisions when the market goes haywire?” This important point is worth including when explaining the value of your services. Preventing behavioral finance mistakes can easily make up for any service cost.

Irrational behavioral biases can impose significant costs on individual portfolio performance. The chart below illustrates the negative impact of bad investing habits. For the 15-year period ended February 31, 2015, the average equity mutual fund investor experienced annual returns of 3.41%. During the same period, equity mutual funds posted annual returns of 4.81%, or 1.40% more per year than individual investors. How could fund investors experience significantly lower gains than the funds in which they are invested? The answer is that behavioral biases often result in investors buying high and selling low.

Individual Investor Returns – 15 Year Period Ended

July 2015

S&P 500 Equity Mutual Fund

Equity Fund Investor 3.41%

4.81% 4.61%

Source: Morningstar Direct. Funds used to compute average investor returns and mutual fund returns meet the following criteria: 1) broad category group is equity, 2) primary prospectus benchmark is S&P 500, 3) Morningstar category is large blend, 4) equity style box (long) is large blend, 5) oldest share class = yes. 60 funds with available data met these criteria. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Past performance is no guarantee of future results. All indices are unmanaged and unavailable for direct investment. Please see disclosures for additional information.

Behavioral biases can cause us to confuse valuation, feel the illusion of control and paralyze decision making. Advisors and investors alike are susceptible to behavioral biases. It is easier to diagnose these behaviors in others than in oneself and to stay rational about investments that are not our own. Advisors have the opportunity to identify detrimental behaviors in clients and address the client’s behavior in order to minimize any potential harm.

Diverse Investment Availability

Many RAs use passive and/or traditional investment vehicles, which is partly why they are able to offer such low fees. This approach has benefits, but it fails to cover the vast and diverse investment options available to investors. Active mutual funds and alternative investments, which can add diversification benefits and alpha generation, can be versatile and valuable tools. Advisors can maximize the value of these investments through due diligence and subject matter expertise.

In order to analyze and explain the benefits of diverse investment availability, advisors can use certain, essential performance metrics, explained in the chart on the next page.


Tax Planning

Advisors have the ability to look at a client’s long term situation and can help manage tax liability, for the current year and for many years to come. With increased tax rates and deduction phase outs at high income levels, income management becomes more valuable. Smart tax planning can make a huge difference and avoid the “sticker shock” of a huge tax bill. When considering whether to accelerate or defer items of income, it is important to be confident that the strategy will maximize present and future after-tax income.

Retirement Planning

With yields at historic lows, generating income for retirement is no longer a matter of simply investing in yield-producing securities. Managing retirement portfolios and investing so that portfolios grow and produce sufficient income requires a holistic look at each investor’s individual

situation and needs. Advisors working with clients

transitioning to retirement are able to take a complete view of the client’s situation and decide the appropriateness of a spending policy. This means they have the discretion to adjust spending amounts based on need, inflation and principal size.

Estate Planning

Creating and executing an estate plan is simply beyond the current generation of RAs. A legacy encompasses all the ways someone leaves his or her mark on this world, and the key components for building a legacy — providing directives regarding the allocation of assets, emotional resolutions with loved ones and dictating how one wants to be remembered — can be confusing to manage and difficult to discuss. An advisor can help clients through both the administrative and emotional aspects of a legacy. ▪

Essential Performance Metrics

Measurement What does it measure? Explanation Formula

Alpha A portfolio’s risk-adjusted performance

or “value added” by a manager For a given level of risk, a higher value added by a manager is desirable Portfolio return – [risk free rate +beta of portfolio (return of market – risk free rate)]

Sharpe Ratio A portfolio’s efficiency It quantifies the return received in exchange for risk

assumed. The higher the Sharpe ratio, the better (Portfolio return – risk free rate)/standard deviation of portfolio

Active Share Percentage of the manager’s portfolio

holdings that differ from the benchmark Can help identify closet indexers; higher active share implies a greater amount of positions that differ from benchmark

Weight of each stock held by the manager relative to the weight of each stock in the benchmark

Tracking Error Active risk or the variability of a portfolio’s

return compared to the benchmark Tracking error alone is not good or bad; it can help identify potential variance from the benchmark The standard deviation (consistency) of the active return, or alpha

Information Ratio A manager’s ability to add incremental

value relative to incremental risk Provides guidance regarding a manager’s ability to consistently produce returns above the benchmark (Portfolio return – benchmark return)/Tracking Error Source: Nuveen Investments


Meeting the Threat

An increasingly popular alternative to competing against robo advisors (RAs) is using them within one’s practice. This is a strategy many advisors have pivoted toward as they seek additional assets. Betterment, Motif and JemStep, among others, offer their platforms for individual advisor use. Using these platforms allows advisors to take advantage of sophisticated software benefits, such as process creation, rebalancing and tax loss harvesting.

Using a robo platform with clients is a business decision — different platforms charge fees differently. What many advisors will find is that the efficiencies robo advisors provide on the investment management side alone does not justify the costs. Attracting new clients at very small margins means you have to attract a large amount of new assets under management just to make a small difference. Let’s say you attract 10 new clients at $10,000 each. If you attract an extra $100,000 in one year at a fee of 50 basis points, you only end up with an additional $500.

However, for advisors who offer investment management as part of broader planning services, robo platforms can provide a systematic way of dealing with part of a service offering. Using a robo advisor can create more bandwidth to take on more clients or better serve existing clients.

The Way Forward

Much is made of robo advisors and the move toward

interaction-free advice. Automation helps heighten efficiencies and avoid mistakes, but machines alone do not make an advisor. Advisors should embrace both software and the soft skills that make them human.

Advisors trying to fight the robo wave on specific points of contention are finding themselves shadowboxing against an agile and increasingly segmented group of opponents. Ultimately, competition will likely depend on the conceptual points of service rather than the specific points of contention, like a 10 basis point fee difference. Remember, only in absence of value, it’s about price. Advisors who develop the skills in our advisor competition plan will be better equipped to compete in a brave new robo world. ▪

The statements contained herein reflect the opinions of Nuveen Investments and its affiliates as of the date hereof and may change at any time without notice. These statements should not be construed as specific tax, legal, financial planning or investment advice and are provided for informational purposes only. This

publication may also contain information from third party sources. Nuveen Investments does not verify nor guarantee the accuracy or completeness of the information presented.

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