by: Charles Lewis Sizemore, CFA

liquid alternative robo advisor Most financial advisors and money managers are terrified of robo advisors. And frankly, if your job description consists of selling expensive mutual funds for a commission, you should be worried. Your business model has been slowly dying for decades, and low-cost robos are the final nail in the coffin.

Technology and competitive capitalism are doing to the financial services industry what they have already done to countless industries before. They're cutting out the middle men and passing the savings on to the ultimate consumer. That's a good thing. A very good thing, because every dollar saved in fees is a dollar that remains in your clients' account to compound and grow over time.

Upstarts like Betterment and Wealthfront (as well as old hands like Vanguard) can build decent traditional stock and bond portfolios that perform every bit as well as the average man-made portfolio. But where they have been less effective is in the alternative space. And this matters -- a lot.

As I wrote recently for Forbes, the traditional 60/40 portfolio is dead, and it's not coming back any time soon. With both stock and bond prices extremely elevated, returns are almost guaranteed to disappoint over the next decade. Bonds, in particular, have gone from offering a "risk-free return" to offering a "return-free risk." So, investors wanting to earn a respectable return will be increasingly pushed into alternative investments, such as hedge funds (see In Defense of Hedge Funds…).

But the problem with hedge funds is that they are only available to the wealthy, and they tend to have high minimum investments and high fees, along with limited liquidity and transparency. While hedge funds can make all the sense in the world in the right portfolio -- and I use them extensively with my accredited investor clients -- they obviously won't work for every investor.

And this is precisely why I created a liquid alternative robo advisor. I wanted my clients to have access to some of the same strategies used by multi-billion-dollar hedge funds. But I wanted to make them available to all investors rather than just the wealthy ones. And I wanted to do it at a reasonable price with full transparency.

Our liquid alternative robo advisor takes clients through a risk questionnaire, much like the more mainstream robo advisors. But rather than dump them into a generic stock/bond portfolio, it assigns them to a volatility-targeted risk parity portfolio. (For a longer explanation of the strategy itself, see our presentation.)

Our fees, at 0.80%, are a little higher than those of Wealthfront or Betterment. But remember, we're not competing with these traditional robos. We're competing with hedge funds and other alternative managers, which generally charge 2% of assets and 20% of profits. And our solution is held in a separately managed account at a reputable third-party custodian.

Creating the liquid alternative robo advisor allows me to serve clients I'd otherwise never be able to serve. The biggest impediment to an advisor growing their practice is time. Your instinct is to try and serve every client that knocks on your door. But the reality is, you can't. There aren't enough hours in the work day to do sit-down meetings with clients that have only modest sums to invest. Time has a monetary value, and unfortunately, you actually lose money on smaller clients. And you have the same amount of regulatory compliance responsibilities with a $10,000 client as a $10,000,000 client. Arguably, you actually have more.

But a robo setup changes that. With a robo setup, you can still profitably serve smaller clients, get them the same portfolios you would give a high roller, and all the while keep the regulators happy. A robo setup also allows a larger client to "kick the tires" and try out your services before committing a larger portion of their net worth to your management.

The financial advisory business is changing -- quickly. With the rise of the robos, there will be a lot of attrition, and a lot of marginal advisors will end up folding their practices. If you want to survive and thrive in this line of work, you need to bring something new to the table. My advice is embrace the robo and build one that leverages what you do best.

This article first appeared on Sizemore Insights as Why I Built a Liquid Alternative Robo Advisor

Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.