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Sunday, November 16, 2014

Will Robo Advisors Kill The Financial Services Industry?

Will Robo Advisors Kill The Financial Services Industry?

Thu, Nov 6 | by Roger Nusbaum


  • The job of being a financial advisor is evolving both as a function of available technology and the financial realities that may confront Generation X and the Millennials.
  • The threat that Generation X and the Millennials are going to be financially worse off than their parents is also a threat to the traditional financial services industry.
  • If Generation X/Millennials are going to have less accumulated than their parents then an advisor faces the prospect of having to have more 'you don't have enough money' conversations.

By: Roger Nusbaum, AdvisorShares ETF Strategist

The job of being a financial advisor is evolving both as a function of available technology and the financial realities that may confront Generation X and the Millennials.

Younger people (younger investors) are of course generally more comfortable with technology than older people and the entire automated advice industry is being built around this truism, as well as the difficulty of "beating" the market. The fees are tiny for portfolio management but in a recent interview Wealthfront CEO Adam Nash said the better comparison was software subscriptions, he said the average $200 they make in revenue from each of their clients is a big number in the software context.

If you do a little research on the so-called robo advisors you might conclude there is no money to be made in this business to which I would add the word yet. Complete dismissal of the idea is essentially a bet against technology and innovation and robo advisors don't need to be wildly profitable to be competition for new clients for your practice.

The threat that Generation X and the Millennials are going to be financially worse off than their parents is also a threat to the traditional financial services industry; new prospective clients will have smaller accounts which means less revenue. There is no way to know absolutely whether this generational effect will play out, but with jobs harder to come by and younger people having larger debt burdens after college it seems plausible and advisors should be paying attention to this and figuring out a strategy to overcome these threats. Relying on wealth transference may not be a good idea either, as more and more boomers are likely to struggle with their retirements.

Over the weekend I found this article about "retirement coaches" who help people with various aspects of retirement, not just financial; in fact some don't even address planning issues. There is, of course, some form of fee for this service and while the comments on the article were plenty skeptical, I can see this sort of thing as being a part of the value proposition that advisors will offer more overtly.

Coaching in the context of the above linked article includes coping with the psychological aspect of retirement, helping clients figure out what to do with their time, helping them figure out how to incorporate some sort of work (if needed or desired) into the mix and a few other things. This sort of help may be in the wheelhouse of some advisors already, but if it becomes difficult to compete with robo advisors on investment results then services like coaching may not be new revenue sources, but can be differentiators for people considering automated advice.

Circling back, if Generation X and the Millennials are going to have less accumulated than their parents then an advisor faces the prospect of having to have more you don't have enough moneyconversations to which a client might respond; so what do we do? Obviously an advisor who wants to sustain and grow his practice needs to be ready for a comprehensive conversation that helps the client get to a real solution.

An actively engaged do-it-yourselfer reading this may think people should not use advisors, questioning the value they add. The question is always valid but the reality is that very few people spend time reading, learning and studying markets, investing and retirement as the typical blog reader or Seeking Alpha reader. One conversation that emerged from the financial crisis was the lack of financial literacy by many Americans. Despite what happened in the crisis, anecdotally not much has changed there. I talk to a lot of people socially who are not meaningfully engaged in their retirement planning.

A point I have made along these lines before is that you, the engaged do-it-yourselfer, are probably the go-to person in your family, among your friends or other circles of influence for markets, investing and retirement questions, so this is relevant for you.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company's past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website

Major Asset Classes: Oct 2014 Performance Review

Major Asset Classes: Oct 2014 Performance Review

Mon, Nov 3 | by James Picerno

October was an unusually volatile month for most of the world's markets relative to recent history, but when the dust cleared there were several winners. U.S. REITs, in particular, ended the month with a hefty gain. In fact, the MSCI REIT Index's 10% surge in October is the biggest monthly advance in four years. Otherwise, October's gains were less spectacular, albeit decent. U.S. stocks (Russell 3000), for instance, closed out the month with a respectable 2.7% increase.

October had its share of losers as well, led by a 1.5% decline in foreign stocks in developed markets (MSCI EAFE). Commodities overall continued to slide, with the Bloomberg-UBS Commodity Index shedding 0.8% last month, which leaves the benchmark lower by more than 6% for the year so far. One reason for the weakness in commodities is the ongoing strength of the U.S. dollar-a stronger greenback tends to be associated with weaker prices for commodities, which are generally priced in the world's reserve currency. The U.S. Dollar Index climbed 1.1% in October, rising to a four-year high by the end of the month. Another byproduct of the bull market in bucks is a performance headwind for non-U.S. assets: a gain is nipped after converting the return from foreign currencies into U.S. dollars, while a loss turns into a deeper shade of red after this forex conversion.

As for the Global Market Index (an unmanaged benchmark that holds all the major asset classes in market-value weights), this passive portfolio inched higher last month, rising 0.9%. The modest gain comes after September's hefty 2.8% decline-the biggest monthly retreat for GMI in more than two years.

On a year-to-date basis, GMI is higher by 4.0%. Unless the remaining two months of the year deliver strong gains, GMI is headed deliver a relatively sluggish performance for the calendar year.


  • jstratt
    Nov 3 05:56 PM
    My play based on Oct is to sell the S&P500 SPY and buy VGK which is Vanguards Europe ETF.

    In the past year the S&P is up about 15% and Europe down 5%. The US dollar is one significant reason as you can buy more Europe anything with your stronger dollar. 

    On the other side my conspiracy thinking emerges as I believe numerous actions have been taken to make voters feel positive before the election. As an example

    - Oil prices drop to what I believe will be lows
    - Interest rates for mortgages drop briefly to significant lows
    - Mkts drop a little and Bullard suggests QE4 is possible
    - Perhaps some timely orders for earnings
    - the usual govt hiring and projects maximized

    Just little things but the result is that Euro stocks may be 5% undervalued and US stocks 5% overvalued. Plus Europe has yet to begin growing. 

    On a 2 yr basis the SPY is about 26% higher and on a 5 year basis about 80% higher. Therefore I recommend a play against an unusual divergence.