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!