The early fear around “robo-advisors” was that technology could replace what human financial advisors do, at a fraction of the cost, and that their low-cost solution would attract consumers in a competitive marketplace. Yet in practice, robo-advisors have failed to capture even 0.1% market share of consumer investable assets, in what appears to be more of a niche solution for a subset of tech-savvy self-directed investors, than a mainstream competitor. Nonetheless, the failure of robo-advisors to disrupt human advisors doesn’t mean that the broader the rise of technology won’t reshape the nature of our advisory firms. Because while our jobs as financial advisors aren’t necessarily threatened by technology, there are other jobs in advisory firms that are increasingly being threatened by technology.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the changing nature of advisory industry jobs due to technology, and specifically why it is the back office (i.e., non-client facing) jobs that really are threatened by emerging “robo” and other advisor technology!
The key distinction is that there are really multiple types of jobs in advisory firms, which broader fall into two categories: “front office” jobs, and “back office” jobs. Front office jobs in advisory firms are the client-facing jobs (e.g., advisors themselves, as well as front-of-office staff like a receptionist). Back office jobs, by contrast, are… the ones that are not front office (i.e., not client facing) – the operations and administrative jobs in the firm (e.g., portfolio trading, account opening, transfers, insurance and annuity applications, etc.). Some people will add in a third category as well, called the “middle office”, which are the jobs that hold the firm together as a business (e.g., executives, managers, researchers, compliance & oversight). The fundamental point, though, remains simply that there’s a range of “advisory firm jobs”, from the front office client-facing stuff, to the back-office administrative and operations jobs, and the middle office jobs that hold it all together.
The reason this matters is that the real threat of robo-advisors (or technology more generally), is not to front-office advisor jobs, but towards the back office and more administrative jobs. Because while back office jobs are absolutely crucial – they’re the actual “doing” jobs that get key tasks done, repeatedly, day after day and week after week, client by client… it’s the very fact that they’re often repetitive tasks that make them prone to being replaced by technology. Consider the process of actually implementing a portfolio… At one point in time, this was a highly manual process (manually type holdings into a spreadsheet, pull up fund reports, do some research on alternatives, calculate tax implications, manually type in all trades, etc.), but with modern rebalancing software, one trader can handle this process for a thousand clients simultaneously in just an hour or two. Which means, for a sizable advisory firm, the clients of a dozen advisors might have historically required a dozen staff members just to do the trading… and now it’s just one person with some software to get it done. And as technology continues to march on (in ever-new categories like robo-onboarding, online scheduling, etc.), back office jobs will increasingly be at risk. Ultimately, this is good for advisory firms, are it allows the firm and its advisors to focus more on working with clients and less on administrative tasks. But it is a threat to those back office jobs.
Which means it’s important for people currently working in back office roles in advisory firms to think about what this means for them in the long run, and which of two paths they want to pursue next. The first option is to try and move up on the administrative side of the organization, shifting from more a back office oriented position to a middle office position. The caveat to this approach is that not everyone in an organization will ultimately be able to make this transition, as there are more admin jobs than manager jobs (e.g., 6 staff reporting to 1 manager means only one can move up!). The second option is to try and move into a front office role (i.e., go down the road of becoming an advisor), starting by enrolling in a program like the College for Financial Planning’s old “Registered Paraplanner” program (now rebranded as the “Financial Paraplanner Qualified Professional” (FPFQ) program), with the ultimate plan of pursuing CFP marks as well.
The bottom line, though, is to recognize that the rise of technology isn’t a threat to financial advisors, because the technology doesn’t do what financial advisors do. But the operational efficiencies technology can create will begin to threaten the back office administrative jobs that complete those tasks today… which may ultimately make the firm more efficient, but means it’s important for those currently in such jobs to reinvest into themselves to thrive in the future!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone. Welcome to Office Hours with Michael Kitces.
As you can see, I’m on the road today. We’re coming to you live from the San Antonio Airport, where I was speaking earlier for the FPA San Antonio chapter’s Annual Symposium, and did an interesting session actually with Ron Insana of CNBC World talking about technology trends in the advisor space and this whole question of whether robo-advisors or technology more generally is more threat or more opportunity. Basically, with all this discussion that robots are going to take jobs, what’s the risk of the jobs outlook in the financial advisor space given all the technology that’s coming in?
Because the early fear, or at least debate, was that basically, robo-advisors were going to replace advisors, at least that’s what the robo-advisors came to market with, saying, “We’re here to replace advisors and do it cheaper.” You know, now that we’re a couple years in with frankly very limited growth of robo-advisors, I don’t mean to knock the assets that they built with, you know, companies like Wealthfront and Betterment at $10 billion to $15 billion, but when the total U.S. investable market space is upwards of $35 trillion to $40 trillion, we’re talking about something on the order of 0.06% market share of investable assets. Which means I think we’re past the question of whether robo-advisors are going to replace human advisors in the mainstream. They’re not.
But it doesn’t mean that the rise of technology won’t reshape the nature of advisory firms, what it looks like, what we do and where the jobs are. And so I wanted to talk about that theme today, because while our jobs as financial advisors I don’t think are necessarily threatened by technology, there are other jobs in advisory firms that I think are actually very threatened by the waves of technology that are coming through.
Back Office Vs Front Office Jobs In Advisory Firms [Time – 1:56]
Because at a very high level, we can break jobs in advisory firms into two categories: front office jobs and back office jobs. Front office jobs in advisory firms are the client-facing jobs. For the most part, that’s us as financial advisors who sit across from clients as well as maybe some folks like your front office receptionist who greets clients when they come in. That’s a client-facing role.
Back office jobs, by contrast, are well, not the front office ones, not client-facing. So this is most of the operations and administrative jobs in the firm: portfolio trading, account openings and transfers, insurance annuity applications, scheduling meetings. Jobs that handle a lot of paperwork stuff, or maybe now, like, e-signed digital paperwork stuff, and are hands-on to make sure that all those important tasks that have to happen over and over again in a firm actually happen the way that they need to. It’s crucial for just delivering the services that we say we’re going to deliver.
Some people do add in a third category as well called the middle office. And the middle office is basically the jobs that hold the firm together as a business. So it’s the other executive and management jobs in the firm. Maybe it’s financial planning or investment research jobs, compliance and oversight jobs, and so forth. You know, other types of higher-level jobs with higher-level responsibilities. Not necessarily about doing client work or supporting clients or seeing clients, but just the rest of the stuff that keeps the business together as a business.
But the key point to understand is that there’s a range of different advisory firm jobs, from the front office client-facing staff to the back office administrative and operations staff, and the middle office jobs that hold it all together.
Technology Threatens The Back Office Not The Front Office [Time – 3:27]
And the reason this matters is that the real threat of robo-advisors or technology more generally is not the advisor jobs, which are the front office client-facing jobs, the threat of technology is the back office, more administrative jobs. Because while the back office jobs are absolutely crucial (the ongoing behind the scenes work, day after day, week after week, client by client, simply has to get done), but it’s the very repetitive tasks that are the ones that are most at risk of getting replaced by technology in the first place.
For instance, take the process of actually implementing a client’s portfolio. So when I started my career, my second job was as a paraplanner and operations associate at a firm. I did this hands-on. And allocating client portfolios back then was a very labor-intensive process. So first we’d look at just what the client positions were in the clients’ accounts. And we had to pull their statements to do that because we didn’t have good software to do downloads and take this in real time. And every client had different investments because we weren’t very standardized back then.
So we had to literally pull out a client’s physical statements at the time (duplicate copies that have been mailed to our office, they were held in the client file), just to figure out what they had. Then we’d manually type up in a templated spreadsheet to show what their current asset location would be. That was the output that we gave them. Then we pull Morningstar Principia Pro reports, which is the predecessor to the current Morningstar research platform, analyze each fund and see how it was performing. Then if we found that it didn’t look good then we’d have to do some research, find an alternative to fit that particular part of the asset allocation pie.
Then we’d have figure out if there was a rebalancing trade or a change, exactly what the trade was going to be, manually calculate any capital gains implications, craft some recommendation for the client so that we could take it into the meeting. And then if the client approved in the meeting, then we had to log in to the, you know, early version of what was a custodian’s website to submit the trade order, typing in one ticker symbol at a time with the dollar amount or the shares.
Then we had to come back the next day when the trade settled and do the purchase. Because we didn’t have an easy way to see if the mutual fund was going to be up and down during the day, so we didn’t know how much of the replacement order to buy until the prior sale occurred. So we’d have to, you know, do the sale, wait for the cash to settle (the cash come in), then decide how many shares of the new stock we were going to buy or the new mutual fund amount dollar that we were going to purchase. It was a multi-day process, completely manual, switching back and forth between spreadsheets, trading platform, Morningstar research tools, took three days. And so each advisor with a good-sized client base had their own full-time assistant just to handle basic rebalancing that had to happen like this each client review meeting all year long.
And now with modern rebalancing software, you can create standardized models, apply them as a template to each client, have the software automatically monitor, track every client, tell you who needs to rebalance, what the capital gains implications are, automatically work up the trade order, write dollar amounts, write share amounts, write account numbers. One trader can hit the button, do this for 1,000 clients at once, takes an hour or two. And most of the hour or two is probably just to verify the software queued up the trades properly as a compliance review. Not because it actually takes the time even for the software to calculate that long.
And what that means is for sizable advisory firms, you know, the clients of a dozen advisors might have needed a dozen staff members to do the trading in the past, and now it’s one person and a piece of software. And maybe a second person to back up the first in case the first one gets hit by a bus.
But viewed another way, for a large advisory firm, the advent of rebalancing software probably destroyed thousands of jobs for traders and advisor assistants that just aren’t needed because of the efficiencies of the technology now. And the more that technology marches on, the more that I think you’ll see this happening. For instance, with robo onboarding tools, you need fewer staff members to do account openings and transfers. With online scheduling apps, you no longer need an assistant to schedule all those client appointments. Because in the end, I don’t think clients really want to call and email someone if it’s something that they can really just do directly with technology with the same amount of time and effort. Like, if I can just click a meeting off your calendar and the time it takes to email back and forth to find the time on your calendar, it’s easy to just not contact you and use a scheduling app.
And the more that we adopt technology like that, the more these other jobs start to disappear. Because clients don’t want to deal with it, we as advisors don’t want to deal with it. That’s why we hire staff and delegate those tasks down. It’s not our value proposition. I’d argue in the end as this technology comes in it actually elevates the value of the advisor because now clients don’t have to contact us for all that administrative stuff. They can just use technology to help them do it and they call us as the advisor for, like, the real advisor stuff, the advice stuff that they need. But in the process, back office jobs start to go away.
Moving From The Back Office To The Front (Or At Least Middle) Office [Time – 8:11]
From the financial advisor perspective, I think this is good news. It means we’re more efficient. It means we can spend more time actually focusing on interactions with clients as administrative task kind of vanish into the technology. We get more profitable firms and we can spend more dollars on more front office staff. Just have more time in front of clients, to have more people giving client touches. All of these are very positive from the advisor perspective and the advisory firm’s perspective.
However, if you are an employee in an advisory firm, if you’re in that trader or sales assistant or administrative position, technology is not good for your long-term prospects. I don’t think literally a robot is going to come to do your job (e.g., there will be some anthropomorphized version of a robot sitting in your chair doing your job), the technology is just going to increasingly automate tasks that you do today and make it less necessary to have staff to do it.
Now, in a growing advisory firm, I actually don’t think this means a lot of people in the current positions are going to lose their jobs. All it means is as the firm grows they’re not going to need to hire more people. And instead, the people doing those administrative tasks now will do it for more and more clients without hiring more people because the technology will make them more efficient and maybe some job duties get rejiggered, job descriptions get shifted and rewritten a little over time.
But for firms that are not growing, or for those of you who maybe are more growth-minded and aspirationally personally about your business opportunity, you want to move up, you need a plan for what happens as the technology gets better and better, because it is going to start to impact back office jobs. Again, I think it’s actually underway already. It will only impact more as the years go by from here.
Which really means there are two tracks. Option one is to try to move up on the administrative side of the organization. If the technology makes repetitive tasks easier, do the non-repetitive tasks, the higher-level investment research, management jobs, human resources, executive leadership – those middle office jobs remain a path forward for more income and more responsibility, with a caveat that not everyone is necessarily going to have the room to move up because there are usually fewer middle office jobs than back-office jobs, right? One manager, six direct reports or admin staff, not all six people can get that one manager job, only one person moving up.
Option two is to try to move into the front office, into a client-facing role and going down the road to becoming an advisor. Which means eventually pursuing CFP marks yourself, or at least starting down the road with something like College for Financial Planning has what they call the Registered Paraplanner designation, which they actually recently rebranded, and it’s now Financial Paraplanner Qualified Professional or FPQP, which lets you learn the skills you need to be a paraplanner and start working as an associate under another advisor and begin taking that pathway towards becoming a financial planner. And then perhaps over time, you can get your CFP marks, or the technical skills to become a planner and the relationship skills and the business development skills as you move up your career track.
Again, the caveat to all of this is that if you want opportunities to move up, you have to be at a firm that’s willing to create these opportunities, and has a career track and invest into its people. And that’s actually why I’m such a strong advocate that for anyone who wants to grow their own career, one of the key questions to ask is whether your firm is growing. Because if the firm is growing, future opportunities will emerge. If the firm isn’t growing, it’s hard to move up. Better technology lets them save on costs, but that means your salary as a staff member is their cost savings. And if new clients aren’t coming onboard, there’s really nothing to move up towards.
But the bottom line is just to recognize that the rise of technology isn’t a threat to financial advisors because the technology just isn’t doing what advisors do. Robo-advisors really never did. They were all about operational efficiency and replacing a lot of back-office administrative tasks that advisors themselves I would argue shouldn’t be doing anyway. They should be tasks that are delegated and eventually tasks that are automated. And to the extent we have back office staff, we can do that now by delegating, eventually, the technology will do it cheaper and more efficiently. Which is why I don’t see the impact of technology as negative for advisors, but a negative for the back office jobs.
So if that’s you, have a plan to move up to the middle office, to the front office, but you need a plan to reinvest in yourself, and grow, and move forward. If you’re a firm owner, have a plan to reinvest in your people so that they can stay with you and move forward as your staffing needs change, because the technology will change them as it takes a lot of the tasks you do today and increasingly and automates them.
I hope that’s helpful as a little bit of food for thought. This is Office Hours with Michael Kitces. We’re normally 1 p.m. East Coast time on Tuesdays, but obviously traveling this week, hanging out at the San Antonio Airport. So thank you for joining us today, a little bit off schedule, but hope it’s been helpful. Have a great day!
So what do you think? Are robots a threat to back office jobs? Are middle office jobs safe from being taken over by technology? How will typical responsibilities shift as technology progresses? Please share your thoughts in the comments below!