Dave Butler: Traditional advisers need to embrace robo technology

Most readers of this blog are familiar with Dimensional Fund Advisors. Based in Austin, Texas, Dimensional’s collaboration with leading academics like Robert Merton, Eugene Fama and Ken French is well known. But you may not be familiar with the work Dimensional does in helping advisers to provide clients with the the best possible experience.

That has been Dave Butler’s primary focus since joining the firm in 1995, although he now has a broader brief as the firm’s joint-CEO.

In this exclusive interview, Dave discusses the changes taking place in the advice profession, the threat that robo-advice poses to traditional advisers, and what advisory firms need to do to ensure that they continue to prosper at a time when fees are coming under ever greater scrutiny.

What’s happening now — the move towards greater transparency, the pressure on fees, the emergence of robo-advice and so on — has been described as a perfect storm for the financial advice profession. What do you make of it?

The good news for us is that all of these concepts — transparency, the emphasis on independent advice and so forth — are themes that we at Dimensional, and our advisers, have been working on for 25 years. The business is moving towards what we and our advisers do. All of this is fine, it’s great. Advisers just have to continue to figure out how they describe their value-add to clients and then articulate it.

The UK and the rest of the world are behind the US on this, but the advice profession is gradually moving away from its focus on the investment piece, isn’t it?

The definition of advice has evolved and changed over time. There are going to be people who consider advice to be how I’m going to allocate your portfolio, what stocks I’m going to pick for you etcetera. The reality is that the more advanced advisers in the US have moved towards what I call a wealth management model, where they recognise the importance of getting the capital market exposure right in a very simple way, the importance of diversification, low cost, reducing taxes and so forth, and having a viable on-going process. Once they’ve figured that out, it frees them up to focus on all the other activities that are very valuable and important to the end client. Advisers should spend more on that than the investment part.

Do you see the growth of robo-advice as a threat to traditional advisers?

We were at a forum a few weeks ago, with CEOs from some of the biggest clients we work with, and the question came up as to how many of those firms had lost a client to a robo-adviser. Out of 23 CEOs only one person raised their hand, and that one person said that, as a matter of fact, the client came back three months later.

What I come back to is the human element. When I think about what an adviser offers, there’s an above-the-line and a below-the-line aspect to it. Now the robo-advisers are playing below the line — it’s the software, it’s the tools, the mechanical part of the process that allows these firms to be in the advice game. Where the advisers that we work with have done very well is with the above-the-line part — the human element.

The robo-advisers are all in a scramble, trying to figure out how to deliver that human element, but that’s much tougher. The advisers who do have that human element are trying to work out how to get more efficiency below the line, using robo-advice tools and software that make the client experience more efficient. The human element is what is really going differentiate the adviser’s offering to the client versus that standard robo-adviser.

What impact is robo-advice having on your own adviser clients in the US?

The robo-advisers in the US are in essence charging about 25 to 30 basis points. It’s not just Vanguard; it’s the other big custodians like Schwab and Fidelity, and well as Betterment and Wealthfront. The challenge for advisers who charge above that is to be clear what that value is, above and beyond 25 to 30 basis points. They need to articulate that better than they have in the past. They also need to get more efficient below the line, to use technology that enables them to be very efficient in terms of delivery, and then double down on what they do above the line. In the US, we haven’t seen a drop in fees; what we have seen is more services being provided for those fees.

So give me examples of how advisers should be embracing technology.

The important trend here is that advisers are going to have to be very focussed on ways of making the process for clients more efficient. Everything from on-boarding to financial planning to tax loss harvesting needs to be worked on. For example, a three-day on-boarding process should be a 30-minute on-boarding process. That’s where the robo technology is going to come into play. It’ll give the adviser a lot more time to do all those other human element aspects, which is going to differentiate their service from a classic robo-adviser, which is just a technology play with a rebalancing of an asset allocation.

What we’re starting to see, especially in the US, is advisers offering face-to-face advice to their wealthier clients on the one hand, and a robo option for younger investors on the other. Is that going to happen more and more?

This is a massive movement that I’ve seen in the US. Given that I’ve been in this business for 25 years now, most of the advisers who we started with are now at that point where they’re either retiring, or they’re thinking about succession, or the training of the second generation in their firm. And most of all they’re trying to figure out what their client experience is and how it can be portable to the next generation. The principal who’s developed a great business and added staff wants to ensure that the client experience that made the firm successful in the first place can be delivered across the second generation. To do that they’re going to have to use technology, to make that experience more consistent and more efficient. Millennials will have a different expectation of what that experience will look like. The fundamental theory, the capital market approach and all the stuff, can be very similar, but there’s got to be an advancement in terms of how the technology is going to help deliver that experience.

Why do you think some advisers are reluctant to move in this direction? Why do so many of them still rely on the investment piece as their main value proposition? Is it fear of losing face?

Yes, I think that’s been a hurdle from Day 1 of my doing this. I rarely see an adviser who would rebut or question the capital market view — diversification, low cost, transaction efficiency, tax efficiency. You never hear people disagree with those concepts. Where they do have a struggle is the marketing aspect — in other words, the value-add, especially if they’ve done things differently for many years.

We would say that as an adviser you’re in a position to continue to look at the market and see what’s out there. You need to have a frank conversation with a client, and say, “This has come to my attention and this is a way of making your portfolio and your experience better.” I think that’s a conversation that advisers should have. We’ve seen it happen many, many times in the US. It’s not an easy transition. But you have to think about fairness to the end client. The adviser is not a delegator — an adviser is an adviser — and part of the advice is figuring out what is the best solution for the end client. There are ways to articulate that to the client where they’ll be appreciative and accepting of that view.

How do you see the advice profession changing over the next 10 to 20 years?

Looking back at the last 10 to 20 years, this idea of meeting expectations has been crucial. Trying to pick stocks and the best manager makes it very difficult to meet expectations properly. We used to have a term called the “never having to say you’re sorry” approach to investing. The idea was that if I was in the business of trying to pick a stock, and it didn’t work out, at some stage I was going to have to go back to the client and say, “I’m sorry it didn’t work out the way I hoped it would.” Or, if I picked a manager, and the manager decided to go 15% into cash in a bull market, I was going to have to have the same sort of conversation with the client.

What we propose is that if you move towards the capital market investment approach, it’s going to be very consistent and will give the result that’s expected. It doesn’t mean that the results are always going to be great from a real return perspective, but you can establish the expectations properly, you’re going to be able to meet those expectation on the investment side, and that frees you up to go into the advice part of the business, which is really the valuable part. I think every adviser has to recognise this at some point.

It’s the personal relationship, the knowledge of the client, and all those wealth management activities that actually do add value. You just can’t get to that if you’re always back-pedalling and always having to go back to say you’re sorry, or if you’re uncomfortable with the results on the investment side.