FINANCIAL ADVISOR INSIGHTS: Why Robo-Advisors Aren't A Threat To Traditional Advisors

Robo-Advisors Aren't A Threat To Traditional Advisors (Business Insider)

The rise of Robo-advisors - start-ups that use algorithms to help investors create and manage their portfolios - is a trend to watch this year. Some have argued that the emergence of robo-advisors is changing the wealth management industry. But Robert Stammers, Director of Investor Education at CFA Institute, doesn't think that this necessarily means they're threatening traditional advisors.

Stammers told Business Insider in a phone interview, that robo-advisors are helping a segment of the market that is underserved. These traditionally target people with about $20,000 - $30,000 in investible assets, while traditional advisors tend to look for those with $500,000 and over. Stammers said there haven't been enough studies or enough data on it because robo-advisors are still so nascent. "I think most traditional investors, even the big warehouses, in order for them to be profitable at the price points that they're selling their services at, people have to have a pretty big portfolio," Stammers said. "The reason that these make sense, is that these have very low margins, so it's very good for the consumer because the cost of advice is low, and it's a volume business. For people with smaller accounts it's really about access."

Referring to Vanguard's new offering, 'Personal Advisor Services', Stammers said, "I keep going back to Vanguard, they has that service already and they're building this robo-advice service because they've realized that there's a part of the market that is not being served, that they can bring on as new clients. So they don't think they're competing with themselves. So I don't see other traditional advisors seeing them as competitive as well."

How To Tell If You're On Track To Your Long-Term Goals (Charles Schwab)

The S&P 500 had its largest gain in 16 years in 2013, and returned over 30% to investors. But not every investor did equally well. It's important for investors to understand how their portfolio performed and if they're on track to meeting their long-term goals. They can do this by doing four key things, according to Rande Spiegelman.

1. Find a suitable benchmark for your portfolio - "Assess the performance of your portfolio as a whole, including all your taxable and tax-deferred accounts," writes Spiegelman. "Compare your portfolio's actual performance in 2013 (accounting for any deposits or withdrawals during the year) to a benchmark return of appropriate market indexes weighted to match your target asset allocation." The portfolio doesn't have to beat the benchmark every time, but it shouldn't underperform it. This is also a good time to consider rebalancing it.
2. Look at the performance of individual investments - Once you're done examining the big picture, look at each stock, bond, and mutual fund's performance.
3. Examine your personal net worth - Assess your net worth, look at liabilities like mortgages, debt, and what you might owe if you sell your assets, and "complete the picture with a statement of personal cash flows-all sources of annual income minus expenses." Compare this with the previous year to see if your net worth increased and by how much and this is a good way to keep tabs on whether you're saving enough.
4. Update your savings and investment plan - "Putting one in place involves assessing your current situation, identifying your goals-retirement, college funding for children and so on-then formulating a savings and investment plan to help you reach them, as well as a distribution plan to fulfill your goals," writes Spiegelman. "Of course, no matter how good your plan is, it won't be of much help unless you take action."

The Stock Market Is More Expensive Than Usual (FactSet)

Stock prices are near all-time highs but they're also expensive. This is because stock prices are rising faster than expected earnings growth. "The P/E ratio of 15.2 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 13.2, and above the prior 10-year average forward 12-month P/E ratio of 13.8," according to FactSet's John Butters. "It is also slightly above the forward 12-month P/E ratio of 15.1 recorded one month ago. During the past month, the price of the index increased by 1.2%, while the forward 12-month EPS estimate increased by 0.2%."

Morgan Stanley saw its Q1 profit surge in part because of the success of its wealth management unit. The wealth management division reported net revenue of $3.62 billion. Higher fees and positive flows helped boost asset management fee revenue climbed to $2 billion, from $1.9 billion a year ago. From the press release: "Wealth Management representatives of 16,426 incr
eased from 16,284 as of March 31, 2013. Average annualized revenue per representative of $881,000 and total client assets per representative of $118 million increased 4% and 7%, respectively, compared with the prior year quarter."

Now that Morgan Stanley has completed its acquisition of the Smith Barney brokerage from Citigroup it doesn't have to share earnings with Citi. In the prior year quarter, Morgan Stanley's wealth management division earnings "included a non-controlling interest allocation to Citi of $121 million."

This Chart Shows Where The Money Has Been Going This Month (Business Insider)

Stocks have been taking a beating this month but equities are still the most popular asset class among investors. "Flow into equity ETFs is still pretty robust," according to David Keeble, global head of interest rates strategy at Crédit Agricole. "Indeed, the $10 billion month-to-date equity inflow compares to a 12-month inflow of approximately $154 billion, so there really isn't any evidence of slowing purchases." Money has been flowing into international equity ETFs and to a smaller degree to large-cap American funds.