PANC 2016: Advice and Robo Advisers

Robo advisers are likely here to stay; as they proliferate, how will traditional advisers stay competitive?

In moderating a PLANADVISER National Conference panel discussion on robo-advisers, Jeb Graham, retirement plan consulting partner with CAPTRUST Advisors, asked a direct question of the attending advisers: “How big of a disruption do you expect from robo adviser competition?”

The flash poll showed most feel robo is only minimal to moderate threat today, and looking out five years it will be about the same, despite the likely entrance of more and more technology providers into the traditional financial advisory domain.

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According to panelist Jeffrey Hemker, national sales manager in the retirement division at Invesco, advisers seem to have grown at least somewhat comfortable with the idea that robo will be a source of competition. But many advisers are also coming to view robo in a fundamentally different way, he said, understanding that the best parts of robo can be folded in to support the traditional adviser.

“If you remember years ago, internet banking was really something that seemed new and different,” Hemker explained. “You may even remember the story of Netbank, which was a tech startup that was going to totally disrupt everything we knew about brick and mortar banking. Well, what’s the case now? The big traditional providers have found their own ways to embrace digital banking and basically beat the disruptors at their own game. Netback, for example, has gone out of business while many traditional banks are thriving thanks in no small part to digital technology.”

Jylanne Dunne, a senior vice president for Fidelity’s clearing and custody solutions business, agreed wholeheartedly with that assessment. She observed that, even during this time of major regulatory shifts, she actually gets far more questions on robo-advice than on any other subject. Many advisers come to the conversation with serious concern, only to come away with new ideas about how to make digital advice work for their practices and clients.

“Our partners come in and they want to know, what does the rise of robo mean for me?” Dunne said. “Where we start the discussion is by asking, what problem are you trying to solve? We let them know right from the beginning that robo-advice can be just as much an opportunity as it is a challenge or hurdle.”

NEXT: The robo-advice spectrum is wide 

Hemker observed that he has already seen many traditional retirement adviser and investment firms successfully embrace different elements of robo—including his own firm, which recently acquired the robo adviser platform Jemstep.

“We are a great example of how robo can complement the traditional services of advisers and investment providers,” he suggested. “Jemstep offers robo adviser service to advisers rather than directly taking over and managing assets. Previously it had been an online automated investment platform as well, before shifting gears to offer its software instead.”

Dunne agreed with the sentiment: “One adviser we work with has recently started bringing in digital planning tools—which many would classify as robo-advice—to enrollment meetings. It’s an opportunity to create an interactive, technology-based planning experience right from the start. A lot of wealth managers are figuring out where they want to be on this spectrum. At one end it is full self-service, and on the other end the adviser is still very much front and center, simply leveraging new pieces of technology where possible.”

Both Hemker and Dunne suggested that finding new successes via robo-implementation “will always be about leveraging the technology to support better discussions between clients and advisers.” In other words, there’s very little reason to think that robo advisers will be able to wholly disrupt the role of the traditional adviser in the way some seem to want to.

“We believe technology is changing the customer and the adviser experience for the better,” Dunne concluded. “We will continue to work with firms to consider their technology and how it’s perceived by clients. The more successful advisers are on these measures, the better their firm performance is on average. I think it goes to show we can all coexist together and together we can create more wealth and reach more investors.”

PANC 2016: Income Options in Retirement Plans

Encouraging plan sponsors to think about the decumulation phase.

Glenn Dial, head of U.S. Retirement Strategy at Allianz Global Investors, said common reasons cited by plan sponsors for not including retirement income products in their defined contribution (DC) plans include portability, technology and fiduciary liability issues. However, he told attendees at the 2016 PLANADVISER National Conference the bigger issue is that DC plans started as supplemental retirement plans and plan sponsors have been traditionally focused on selecting investments for their plans so participants can accumulate wealth.

Annuities in the past have been used in money purchase pension plans and 403(b) plans, so one would think these issues have been addressed, Dial noted. The government feels it has given plan sponsors what they want in the Internal Revenue Service (IRS) guidance about choosing annuity providers, but plan sponsors want a better safe harbor.

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Donald Stone, director, DC Strategy and Product Development, and senior consultant at Pavilion Advisory Group, says there is a need for decumulation with target-date funds (TDFs) or managed accounts. Even though many of these products carry through retirement, they do not address the fact that participants do not know how to create a paycheck in retirement. Retirement income products would help, but with plan sponsors reluctant to use them, Stone encourages advisers to work with clients to allow for systematic withdrawals from their plans.

Timothy J. Pitney, senior director, Institutional Investment Strategist, TIAA, noted that retirement income options address longevity risk, market risk, interest rate risk and cognitive decline. “Participants want this; they have a genuine fear of running out of money,” he said.

He noted that 403(b)s have been using annuities for years, and though there are still portability issues, he believes these products will come back. TIAA is working on a solution to include retirement income options in TDFs, as well as an arrangement in using liability-driven investment strategies for DC plan participants.

Stone pointed out that there are a number of products available in the retail market, and all can be recordkept if recordkeepers would commit to programming their systems, but recordkeepers are reluctant to spend the money because they are not sure there is demand. “Advisers need to get plan sponsors focused on creating retirement income for participants,” he said. “They can introduce just one product, and add more as they become comfortable.”

Pitney said it is a behavioral game. It is hard to ask participants to separate themselves from their money.

NEXT: Getting retirement income solutions in DCs started

Dial believes TDFs are the starting point for introducing lifetime income options in DC plans. “There is a huge percentage of participants defaulted into TDFs,” he noted. “Today’s TDFs are trying to get participants the highest possible account balance, but they should take a different approach as participants near retirement.”

Stone said the struggle for advisers is when creating a investment lineup for retirement plan clients, not all tiers may be there. Recordkeepers can handle a do-it-for-me tier, a tier for those who want to select themselves, but with help, and a tier for those who want to do it all on their own—brokerage windows. “But, there needs to be another tier for pre-retirees to create lifetime income.”               

He reiterated that he suggests advisers convince plan sponsors to offer systematic withdrawals. “Talk to them about the workforce issues of participants not being able to retire as well as how keeping money in the plan can help them keep costs down with better bargaining power,” he told attendees. “This is one retirement income option we should be able to solve pretty quickly.

Asked if robo advisers can contribute in helping participants create a retirement income plan, Dial said it would be tough for robos to play a role in retirement income. He suggested that most employees of this new generation retiring with only a DC plan do not have an adviser, and they won’t go to a robo when they are getting ready to retire, because studies show that is one time people want to talk to an actual person.

However, Pitney said advisers can use robos in their practice to bring down the costs of running scenarios and providing advice.

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