Robo Advisor Platforms For RIA Firms

Posted by Aurora Compliance Solutions

The “Robo Adviser” platform has its supporters and it also has its critics. I’ve been in the financial industry for almost 20 years and have seen a lot things come and go. The first thing that comes to mind is the emergence of the ETF.  Companies that embraced ETFs early on (late 90’s) have done really well. While the companies that just stuck their toe in the water with one or two ETF’s missed the boat (i.e. Fidelity’s ONEQ). That being said, the emergence of the Robo adviser technology seems to be following a similar path to that of the EFT.

Today the typical RIA uses 3 types of investment vehicles: Mutual Funds, ETF’s and/or Individual Securities. Out of the 3 types, the ETF option is the option best suited for the Robo platform. This is because of the ever increasing amount of liquidity in the ETF space. RIA firms that use Mutual Funds and ETF’s as investment vehicles could really benefit tremendously by embracing the Robo technology.

“Robo Advisers” operate under many types of business models and are used by a growing number of RIAs in a variety of different ways.  “Robo-Advisers” use technology to provide discretionary asset management services to the client. Initially the industry looked at Robo’s as a way to engage millennials. However, we at Aurora Compliance Solutions have seen emerging RIA firms embracing the Robo platforms in increasing numbers. We’ve found that most RIAs initially look at the Robo platform as a way to take on more clients by lowering the minimum initial investment amount. However, once they start using the new technology they soon realize it can implemented across most client accounts.  By embracing the technology they are embracing a low cost & cutting edge way to automate the rebalancing of all client investment accounts.

By using a “Robo” platform, an investment advisory firm has the ability to:

  • Set model portfolios that can be easily duplicated for multiple clients.

  • Lower the risk of trading errors.

  • Lower expenses to both the RIA firm and the client (increase revenue).

  • Automate tax loss harvesting.

  • Easy account implementation.

  • Lower the minimum initial investment per client.

Conclusion

The Robo adviser technology is being embraced by the RIA population in increasing numbers and the technology allows retail investors the ability to afford the services of an investment advisor that acts in a “Fiduciary” capacity that historically was out of reach. This being said an RIA using the robo technology platform needs to be aware that they still have a “Fiduciary Obligation” to each and every client. The SEC has recently released updated information as guidance to assist investment advisors meet their obligations under the Investment Advisers Act.

Written by Edward E. Romanowsky, Sr. President & CEO of Aurora Compliance Solutions