Finding Middle Ground in the Robo-Adviser Debate

There’s no shortage of discussion in the retirement plan advisory business about the disruptive power of technology, and how business models may transform in the years ahead.
Reported by John Manganaro

The debate often crystalizes around the controversial but ill-defined notion of the “robo-adviser,” explains Jeff Eng, director of retirement income solutions at Russell Investments, and whether investors will ever be comfortable with fully digitized financial advice. Some in the industry say yes—the efficiency and scalability of fully digital advice will eventually push traditional advisers out of the way. Others say no—believing digital advice will never perform as well as truly one-on-one, long-term consultation between investor and trusted adviser.

It’s a familiar debate, Eng notes, but it’s also unfairly diametric. Eng says the industry is already creating innovative solutions that merge digital and traditional advice in the best interest of end investors. Unlike some industry watchers, Eng predicts a more symbiotic relationship between technology firms and traditional advice providers.

“For Russell, a big part of this is the Adaptive Retirement Accounts [ARAs],” Eng tells PLANADVISER, explaining that the ARAs grew out of a partnership with Chicago-based digital adviser and technology provider NextCapital. Eng suggests the ARAs can help retirement specialist advisers strike a middle ground between traditional and digital advice delivery, leading to improved outcomes for plan participants while keeping the adviser’s core business model relevant.

In basic terms, the ARAs allow an adviser to leverage recordkeeping data to implement things like automatic portfolio rebalancing, customized glide path development, real-time retirement readiness reporting, and other helpful digital solutions that make servicing a large number of retirement plan participants much easier, Eng says. But crucially, the system is open architecture—meaning the ARAs do not come along with a preprogramed list of proprietary investments or premixed funds that must be used by participants. Instead, ARA portfolios are built from a retirement plan’s existing fund menu, Eng explains, which has likely been built with fiduciary input from an adviser.  

“We know a lot of our client advisory firms are serving as 3(21) fiduciaries or as 3(38) fiduciaries for their retirement plan clients. This means a lot of them are doing the due diligence and ongoing monitoring of the underlying funds that make up the core retirement plan menu, and that’s a big part of their traditional value proposition,” Eng notes. “We’re looking to build on that—because that’s the appropriate role of the adviser.”

Under the ARA solution, advisers continue to do fiduciary due diligence and fund monitoring on the plan’s menu while allowing Russell to handle key components of individual client servicing, such as automatic quarterly portfolio rebalancing and the creation of individualized glide paths.

“We’re just going to take over the client service components to help participants take full advantage of the funds that are being selecting by the adviser,” Eng says. “It’s really another great value-add for the adviser to bring to the table.”

Eng says Russell envisions the ARAs becoming popular for advisers to offer as a digitally supported qualified default investment alternative (QDIA)—noting that Ingham Retirement Group recently re-enrolled about 40 of its own employees into Russell Adaptive Retirement Accounts. Ingham is also beginning to offer the ARAs to clients via its advisory platform, Eng adds.

“This service highlights the fact that advisers play a critical role in helping their clients,” Eng says. “We want to be able to partner with them to provide defined contribution plan investors with the best services possible. We’re able to step in and say, ‘Here’s exactly how each participant should be using this great lineup that the adviser has built. We're here to make sure each participant is serviced appropriately.’”

Dirk Quayle, president of NextCapital, tells PLANADVISER that the automated support available through the ARAs means each participant gets a customized allocation and glide path based on their individual retirement readiness outlook, as contained in their recordkeeping data.

“The data allows the adviser to know when to do a transaction, when to make changes to which participants’ holdings,” Quayle explains. “This can be fully automated, or the system can put up a flag when some important step needs to be completed or something needs to be monitored more closely by the adviser.”

Both Quayle and Eng suggest the ARAs and other like-minded approaches to mixing digital and traditional adviser services could spell greater competition for the growing target-date fund (TDF) industry.

“At Russell, we still believe in TDFs, but we understand that certain plan sponsors believe in a more customized investment strategy for their plan participants—often they are looking for improvement above and beyond in terms of things like retirement readiness and retirement income,” Eng says. “For these sponsors, the ARAs really make sense to bring that next level of customization.”

Quayle suggests this approach also solves another common problem that advisers face in adopting premixed TDFs.

“When a TDF is deployed off the shelf as the QDIA—very rarely is it going to be personalized to the real plan participant population, and it’s not going to use the individual funds the adviser has picked,” he explains. “So for the adviser, with the ARAs you get the double benefit of having better customization in the QDIA while also getting to use the fund menu you have already put so much time and effort into building and monitoring.

“This technology is designed really to let the adviser get and stay involved as much as they want,” Quayle concludes. “They have options—they can take a more hands off role or a more hands on role, depending on their unique business model. In either case, they definitely maintain a stronger relationship with the ARA solution than a lot of other digital managed account opportunities that are out there.”

Tags
Advice, Lifecycle Funds, Managed accounts, Practice management, QDIA, Selling,
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