It’s an image I cannot shake. The mention of robo advisers conjures up the Robot from the 1960’s television series Lost in Space swinging his metal arms, buttons beeping, warning “Danger, Will Robinson, danger.” That’s exactly the message the advent of robo advisers delivered to the financial planning profession. However, so far at least, the threat has not materialized for my practice.
Of course, that doesn’t mean that robos have not been successful, transformative and even — to use that catch-all technology phrase — disruptive.
The number of Wall Street firms jumping on the automated advice bandwagon seems to be growing by the day. For instance, California-based SigFig Wealth Management partnered with UBS Group and other investors to develop new online management tools. BlackRock bought FutureAdvisor. Charles Schwab launched a robo adviser after Vanguard’s introduction of an online wealth management tool. In addition, Wells Fargo, JPMorgan Chase, Bank of America and Citigroup have all said they plan to offer low-cost, automated investment services either on their own or by joining with a private-label robo adviser.
Amazingly, the financial services research firm Cerulli Associates predicts assets managed by robo advisers will rise 2,500% between 2015 and 2020, to $489 billion.
QuoteSurveys show that investors themselves believe that embracing technology should not mean replacing human advisers.
This growing focus on automation certainly has registered with individual investors. In a 2014 survey, State Street Center for Applied Research asked more than 1,600 investors: “In the future, do you think that technological advances in providing financial advice will better serve individuals with regard to value and cost than financial advisers?” More than three-fourths (76%) of millennials, 67% of Generation X and even a majority of baby boomers (54%) answered in the affirmative.
That’s not surprising given the robos’ simple and attractive pitch to consumers — they offer technology that democratizes access to sophisticated financial advice by reducing the costs.
My comeback to the claim that robos lower costs is straightforward: You get what you pay for.
In the wake of the financial crisis and the Bernie Madoff scandal and with the DoL extending the fiduciary standard to all retirement plans, I believe that today’s investors want and deserve more from their financial advisers.
In fact, investors themselves seem to believe that embracing technology should not mean replacing human advisers. In the State Street Center survey, 95% or more respondents listed these key characteristics of advisers they would like to work with: understanding their financial needs and goals, a high level of integrity, having their best interests at heart and welcoming open and honest communication. Obviously, these are the characteristics of a human adviser, not an algorithm.
QuoteSo far, algorithms can’t take us by hand or sit down over lunch to reinforce long-term goals.
What’s more, low fees, the central advantage of robo advisers, finished second to last in that survey, with 76% of respondents listing it as a key concern, according to the survey, conducted for State Street Global Advisors.
Also illuminating were responses to the question of how different generations say they prefer to work with their advisers. The survey, titled “Embracing Change as Opportunity: Harness the Power of the Robo Advisor in Your Practice,” found 54% of millennials, 50% of Generation X and 49% of boomers agreed with this statement: “I prefer working face to face or over the phone when making investments.” Surprising, right? We might expect millennials to be more predisposed to embrace technology.
My experience tells me that investors overwhelmingly place a higher value on advice when a person is involved.
That’s another victory for the traditional human adviser who can provide counseling and decision-making assistance when a client has life changes or the stock market gets rocked. So far, algorithms can’t take us by hand or sit down over lunch to reinforce long-term goals.
Don’t get me wrong, in my practice we make use of advanced technology to rebalance portfolios and I can see this increasing over time. To work with Gen Xers (my own generation) and millennials in the most efficient way, I’ve steered folks who don’t meet our AUM minimums to online investment management programs.
QuoteSome of the concerns raised about robos include a trading halt in which many investors were not notified and portfolio designs that seem inappropriate for the investor.
Most recently, I helped Isabella, a young woman, with the allocation in her 401(k) and set her up on Acorns.com to save $5,000 a year for five years to accumulate enough for a down payment on house. From there, I’ll check in with her on an hourly or retainer basis. For investors like Isabella, robos offer access to financial advice at a lower cost. That means she can get a head start on investing.
That said, I do have a few concerns with robos:
Trading issues. When stocks declined in the wake of Britain’s vote to leave the European Union, Betterment halted its trading on June 24 in U.S. stocks until roughly noon Eastern time. To be clear, the firm wasn’t breaking any rules. But it turned out that Betterment had notified more than 200 financial firms that use the platform of the trading suspension but made no disclosure to many more clients who interact directly with Betterment without an intermediary.
This inequity prompted Massachusetts’ securities regulator William Galvin to send a letter to Betterment voicing “serious concerns regarding the inconsistent manner” in which it informed only some clients of the trading halt. While Betterment sat tight, I was on the phone with clients who I knew might be worried, offering reassurance. With other clients, I presented the S&P 500’s 3.2% drop as a buying opportunity – one that happily paid off just weeks after the vote.
This may have been a one-off situation from which many have learned, but I'm not 100% comfortable that a robo trading halt won't happen again with another platform.
Future regulation. Trading halts bring up questions of how robo advisers are regulated. “Providing financial advisory services electronically is different than the traditional adviser model, but in many respects our assessment of robo advisers is no different than for a human-based investment adviser,” the SEC chairwoman Mary Jo White said in a speech on March 31 at the Rock Center for Corporate Governance at Stanford University.
But is it possible that states might have their own ideas? To date, Massachusetts’ Galvin has been the strongest voice for more oversight. In particular, he wants to ensure that state-registered advisers do not charge excessive fees when they simply direct clients to robo advisers.
Questionable time horizons. A study by Stephen J. Huxley and John Y. Kim of Asset Dedication, a San Francisco firm that provides turnkey asset management for financial planners, finds that equity portfolios recommended by robo advisers for “moderate” investors were “most strongly correlated to portfolios designed for one to three years.”
They suggest that given that the average client of a robo adviser is younger, perhaps under age 40, these portfolios should be invested more aggressively for the long term.
For me, this calls into question the validity of the robos’ risk-tolerance questionnaires. As the authors conclude, “By attempting to lower near-term volatility, robo adviser portfolios sacrifice both long-term expected and downside performance for time horizons typically relevant to these clients.”
For investors who don’t want another relationship to manage, or for whom cost is the absolute driver, robo advisers offer a reasonable solution. At the same time, incorporating these platforms could add practice efficiencies for some advisers. And, for others, robo advisers offer an economically feasible way to serve clients with limited assets.
But, for as long as personal conversation is valued, my practice will not be threatened by robos. To quote another favorite television show, “Sometimes you want to go where everybody knows your name.”