In Practice April 2, 2015

How Disruptive Are Robo-Advisers, Exactly?

A recent Cerulli Associates report assesses whether eRIAs, also known as robo-advisers, could be challenged in the medium and long terms by a “first-mover effect.”
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“The electronic registered investment adviser [eRIA] or robo-adviser business model presents the opportunity to bring technological upgrades to an industry hampered by legacy systems,” says Frederick Pickering, research analyst at Cerulli.

At the same time, traditional advisory firms and investment providers have asked about the potential for robo-advisers to disrupt an industry not exactly known for rapid innovation. While many see opportunities for traditional and digital advice models to work in sync, some robo-practitioners predict their firms will make the human-to-human financial advisory model obsolete.

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Pickering says the latest Cerulli reporting suggests this latter view is probably overstated.

“During the past few months, significant developments from existing direct firms have dramatically changed the eRIA conversation,” he explains. “While the low-cost business model pioneered by these firms may stick around, it is unlikely that the eRIAs will be able to compete with the low-cost offerings of the direct firms.”

For example, it caused a lot of retirement industry chatter when Northwestern Mutual announced last week that it is acquiring financial education technology provider LearnVest. This type of deal, through which a long-established investment services provider with a traditional sales, distribution and client-service structure uses its considerable scope and financial resources to purchase and integrate unique competitors, represents one of the major “threats” to the robo-adviser model, Cerulli explains.

Pickering says robo-advisers still enjoy considerable tailwinds and opportunities for success and lasting independence, but firms could be targeted for acquisition by the big players in the years ahead. Others may see their uniqueness and competitiveness fade in the face of responsive innovation.

“For eRIAs, imitation is a serious threat to their continued existence,” Pickering adds. “These firms have rolled out innovative ideas, but the existing financial services industry has ample resources available to replicate the robo-adviser business model. Previously, many robo-advisers banked on the idea that financial firms were unwilling to duplicate their model for fear of upending their revenue.”

Instead, as explained in the “The Cerulli Edge – U.S. Edition,” traditional firms are starting to respond to the “innovator’s dilemma” by building their own eRIA-type services, or by purchasing digital advice service providers that seem like a good fit with the existing sales structure.

“With increased fee compression and expanded services from the direct space, eRIAs may be forced to change their business models to become technology providers to advisers,” Cerulli concludes, similar to findings shared recently with PLANADVISER by another research firm, Corporate Insight. “The larger direct firms may replace eRIAs in the automated investment space, but the presence of eRIAs will have changed the advisory industry for the better. By emphasizing low cost and sleek technology, they have forced existing firms to take technology offerings seriously.”

More information on obtaining Cerulli research is available on the firm’s website.

Products April 2, 2015

External IT Upgrades Adviser Cloud Desktop

Security enhancements to External IT’s Cloud Desktop improves security, visibility and control by shining a light on the applications and data that advisers access.
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“The Cloud is great,” says Sam Attias, vice president of the financial services division at External IT, especially when it comes to innovation and ease of access. “But right now, everyone doesn’t realize what they’re sacrificing when they use it,” he tells PLANADVISER.

Pre-Cloud-based systems often rested on a series of independent, isolated silos, External IT maintains, increasing the potential for security vulnerabilities and keeping advisers from critical security insights. Who is using which applications? Where are they? When are they using them?

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Data security is easily compromised, Attias says, which led the firm to add a capability clearly showing user activity, tracking login locations, IP address, time of access and which device is used, along with the specific applications launched. Administrators and advisers can view activity while encouraging users to take more responsibility for the security of their own data and the devices they use.

The single, secure place for all applications and data gives users flexibility while firms gain centralized control of sensitive data. 

The Securities and Exchange Commission (SEC) requires firms to maintain a log of any device that advisers use to access firm information. This task was quite easy ten years ago, according to Attias, a simple matter of checking whatever computers were in the office. But in today’s bring-your-own-device world, when information can be accessed on a range of devices and from any location, it is much more difficult.

External IT’s interface creates a log that shows different locations for the user, which can be printed out. The platform also allows sensitive files to be wiped from any device in case of loss or theft.

“As the Cloud becomes the inevitable norm in financial services, advisers’ primary concern is security,” Attias says. “Most would rather sacrifice convenience to keep their data safe. Giving users the freedom to work anywhere, while showing them their own activity, allows them to be proactive about data security rather than waiting for a back office IT professional to notice suspicious behavior.”

Pricing runs between $150 and $200 per user per month. The cost is driven in part by the level of disaster recovery and how much management of the local network, router, firewall and end devices the subscriber chooses. Some types of applications can require a special type of server, Attias says, which are sold separately as a component.

More information about External IT is on their website.

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