In a Workforce.com article, Advice Going Robo – the question of whether defined contribution (DC) plan sponsors should turn participant advice and even administration over to robo advisors and record keeper is raised. And although the services provided attempt to make what is very confusing very simple, the decision by plan sponsors is anything but simple.
With $12 billion under management by top independent robo advisors projected to grow to $285 billion as traditional financial services companies like Vanguard, Schwab and Fidelity offer their own robo advisors and BlackRock acquiring one, the use of computers to help people make better financial and investment decisions only makes sense. By using passive ETFs and limiting the use of personal advice, the costs are very low. For plan sponsors concerned about high, opaque fees by traditional record keepers, the low cost simple pricing of robo record keepers like Betterment can be appealing.
And Millennials may actually prefer dealing with online advisors comfortable with digital interfaces available on their time.
No wonder robos like Betterment, which boasts 200 DC clients have turned their eye to the almost $7 trillion DC market. Financial Engines and Morningstar, well known and trusted names, have been providing online advice to DC participants for over a decade with Morningstar offering a robo fiduciary service in anticipation of the new DOL conflict of interest rule.
Sounds good? But plan sponsors have to be careful to understand if all of their employees would be comfortable having a computer makes their financial decisions. Older workers are more comfortable talking to people, especially someone they know and trust like the plan advisor. Small and mid-size plan sponsors may need more hand holding when it comes to running their DC plan as almost 90% rely on a financial advisor who don’t seem to fit into the robo model.
Though the new DOL rule may favor these fee based robo advisors, there is a conflict if the underlying investments like ETFs are manufactured by the financial firm offering the service.
So will robo advisors and record keepers put advisors DC service providers out of business like Amazon did to traditional bookstores? Not likely but for some firms and for some services, it might make sense.
