UTICA — The robot explosion is here. Today’s robots not only build our cars, but also even drive them. They bounce around our houses vacuuming and cut our lawns. The military and police use robots to defuse explosive devices, and oil and gas companies utilize them underwater to build and maintain pipelines. Search teams depend upon them to find victims of natural disasters, and doctors rely on them to perform micro-surgery. In Singapore, the Nanyang Technological University even has a robot that works on-campus as a receptionist.
So why not hire a robot to handle your investment portfolio? According to Gauthier Vincent, the head of U.S. wealth management at Deloitte Consulting, LLP, more than $100 billion in assets are already under management by robo-financial-advice services. (The term “robo” encompasses firms that are both all-digital and those that are hybrids, combining computer-generated recommendations with some degree of human support.) Vincent goes on to project that robo-financial management will reach $5 trillion to $7 trillion in the next decade. Robo firms depend in large measure on algorithms to recommend and manage low-cost funds that offer computer and mobile interfaces, which incorporate other aspects of financial and retirement planning.
One local investment firm has introduced its hybrid answer, technology plus people, to this robo trend.
“Clients that currently have small portfolios with the potential to grow, especially young professionals, are underserved and undereducated in the areas of investment management and financial planning,” says Alan Leist, III, a principal and senior adviser at Strategic Financial Services, Inc. headquartered in Utica. “StrategicSKY, which we launched this past summer, is our solution to this systemic issue. We’ve been tracking the growth of robo-services very closely. Technology is particularly helpful in portfolio construction, rebalancing, and accessing and displaying data on demand. This frees up an advisor to spend more time on a client’s complex needs, such as budgeting, debt management, and tax planning. Marrying the online component with personal support makes good sense. This … [hybrid] model complements our focus on the core client group.”
StrategicSKY
Technology
The program offers five target portfolios reflecting a client’s personal risk-and-return profile. “The options range from conservative to aggressive growth using different time horizons,” continues Leist. “Once the client selects which profile fits best, the Strategic Financial investment team allocates the investment to a diversified series of low-internal-cost exchange-traded funds (ETFs). We have adopted Blueleaf as the client’s online financial dashboard to track performance, asset allocation, transactional data, detailed-holdings information, weekly updates, educational content, and secure data-sharing and collaboration technology. Blueleaf lets the client track all of his/her assets in one place.
“The platform also has access to custodial data from over 11,000 institutions,” Leist adds, “which means built-in account aggregation. In other words, users can add assets to Blueleaf not managed by Strategic Financial and track their entire portfolio on one screen. I like to call it taking the aggravation out of aggregation.” StrategicSKY utilizes Charles Schwab & Co. as the third-party custodian for the accounts. Clients can set up banking instructions online for automatic contributions or withdrawals, update personal information, and download monthly statements and tax documents. StrategicSKY uses a fee-based, business model: An annual fee of 1.5 percent is charged on the first $250,000 of market value, a fee of 0.90 percent is charged on the market value over $250,000.
The personal touch
“Our clients really enjoy the technology and on-demand access to their portfolios,” interjects Matthew Brundage, a financial consultant and the lead contact at StrategicSKY. “But they also appreciate my role in helping to personalize their portfolios, coordinate review meetings, field questions, provide timely communications, and offer financial education. In addition, I help in transitioning accounts to SKY. I don’t see my role as passive, but I let the client drive the conversation. Since we launched the program on Aug. 15, we have signed up 127 clients, all by referral.” Brundage is a recent graduate of SUNY Polytechnic Institute, earning a bachelor’s degree in business administration with a minor in finance. He expects to complete his MBA at SUNY Polytechnic in 2017. The Whitesboro native joined Strategic Financial in May 2015 as a client-service specialist.
Target demographics
Over a generation, the financial industry will see an inter-generational wealth transfer in the U.S. of $30 trillion. To study this phenomenon, market researchers divide the population into cohorts called generations. The Pre-World War II cohort holds about 20 million people; the Post-War cohort approximately 40 million; the Baby Boomers represent 80 million; Generation X about 60 million; Generation Y, also known as the Millennials, 70 million; and Generation Z another 25 million (to date).
“We set up StrategicSKY for anyone with $50,000 to $500,000 to invest,” explains Aaron Evans, a senior adviser at Strategic Financial. “While the program is designed for investors of all ages located anywhere, we anticipate that many will be Millennials who are beginning to build wealth here in the [Mohawk] Valley, and not just in their 401(k)s. This younger group is well-educated and has a … [mountain] of information available to them, probably more than they have time or the inclination to process. As much as Millennials embrace technology, many also recognize that a totally automated program isn’t for everyone. We know this generation is concerned about risk, because they lived through the tech bubble of 2000 and the [financial crisis of 2008]: That’s why SKY strikes the right balance between risk and reward.”
Millennials
One of the largest, demographic generations in history is moving into its prime spending and investing years, and its members are reshaping the economy. Demographers have garnered a trove of information about their habits. A growing number is choosing to live at home with their parents. Concomitantly, the percentage of young people 18-31 years of age married and living on their own has dropped from more than 50 percent to 23 percent (2012 figures). Because so many are unemployed or underemployed and carrying tuition indebtedness averaging $35,000, they are putting off major purchases. The 18-34 cohort also is thrifty. While they make frequent purchases and go out often, a report from TD Bank says they spend on average a quarter less than older generations. (The exception seems to be purchasing coffee, where the Millennials spend 20 percent more than the average for all cohorts.) When it comes to financial investing, Generation Y is extremely price-conscious. In addition, Millennials are comfortable with a “subscription economy,” where they utilize services such as Airbnb and Uber rather than assume ownership.
Technology has made them savvy shoppers. They assume that all industries offer an online platform, so it comes as no surprise that they expect financial businesses to provide automated-investment tools. The Millennials concern for low prices has attracted them to ETFs as a low-cost option. The underperformance in the past decade of many actively managed accounts has also pushed them in the same direction. In addition to low fees, the ETFs provide diversification and transparency. In the area of communication, Millennials prefer to text rather than talk. They forgo a visit to an office when downloading an app will suffice. The average, daily screen time for this cohort is 10 hours, according to Nielsen, and TV is rapidly being replaced by social media. Finally, Millennials are redefining the future of work as they increasingly adopt a “gig economy.”
Marketing StrategicSKY
“We’ve been very low-key in our marketing of the new platform,” stresses Michael Leist, head of marketing and business development at Strategic Financial. “To date, our marketing has been confined to referrals from existing clients and professional business advisers, while we work with our new clients to better understand where we need to improve the … format [and implementation]. To put it a different way, we need to walk before we run. While the initial review of our progress is positive, the plan is to do a broad review of our total marketing next year, and at that point, we’ll market SKY through multiple channels, including a [robust] social-media program.”
Strategic Financial Services
Between its investment and wealth-management group and the corporate-retirement planning group, Strategic Financial Services currently has more than $1 billion in assets under management. Founded in 1979 by Alan Leist, Jr., the firm currently employs 28 people and generates approximately $7 million a year in revenue.
The strategic plan projects revenue growth of 8 percent annually. The company is headquartered in a 9,000-square-foot building located on Business Park Drive and also has offices in Syracuse and West Palm Beach. Strategic Financial’s core-group customer profile includes individuals with $1 million to $20 million in liquid assets or the potential to reach this bracket and a net worth of $5 million to $100 million. The institutions it serves have endowments between $1 million and $20 million. Strategic Financial relies on advice from the firm’s 10-person research department to guide its investments.
Passive investing vs. adding alpha
Robo firms, such as Betterment, Wealthfront, and CircleUp which rely totally on an automated platform, offer users sophisticated investment strategies including asset allocation, rebalancing, and tax-loss harvesting. The minimum investment at Wealthfront is just $500 while Betterment has no minimum requirement. CircleUp even offers its investors the opportunity to invest in privately held companies, which are normally difficult to access. Investing in index funds, where a portfolio mirrors the components of a market index, is akin to being on autopilot. Sit back, relax, and enjoy the simplicity of the process, diversification, low cost, low-portfolio turnover, and respectable returns.
Managed funds suggest a pilot at the controls whose job is to add alpha, the amount of market outperformance attributable to the financial advisor’s skills. Effective active managers can protect investors from sector or geographic weaknesses during periods of volatility by employing hedging. They can also identify the “diamond in the rough” investment through research. They also tend to be more risk-averse in order to protect their clients against a market drop. While the number of ETFs has risen from about 150 in 2004 to nearly 2,000 at the end of 2016, there is still a lack or paucity of vehicles in some areas of the market, a barrier that active managers can work around.
“As active financial advisors, we can develop a strategy tailored to the individual client,” notes Leist, III. “Part of our job is to remind our clients to avoid panic selling and stick to the long-term plan. Technology lets us track client contributions and withdrawals to compare with their budgeted goals. We’re there to adjust investment strategy for major life changes and help with tax planning. The key is to marry the benefits of both technology and active management: Build a platform that integrates robo-investing with research and active management focused on the client’s needs. Our answer is StrategicSKY.”
Editor’s note: Poltenson is a client of Strategic Financial Services.