As the CEO of a financial technology company, I’m biased toward the idea that “10X better” innovation has the opportunity to profoundly disrupt industries. We have all watched how Google rose to disrupt the Yellow Pages, Craigslist collapsed classified ads, Apple replaced the flip phone, and Netflix erased Blockbuster from a thousand shopping centers.

So there’s a reason our industry’s trade press has taken to printing just about any story with the words robo advisor in the headline. Not too long ago, I was chatting with an editor at one of these publications who told me about a robo story they had decided not to cover. I suggested that might be breaking news in and of itself.

Are robo advisors poised to disrupt human advice? Or will they fail to hit that mark? To guess at the right answer to that question, we need to dig deep and understand the businesses we’re talking about.


One telling fact is that all of the firms that the press writes about as robo advisors fit nicely into two categories that have existed for thirty years. Wealthfront and Betterment are self-directed businesses where consumers use a service to invest for themselves. Personal Capital and Vanguard Personal Advisor Services are advice businesses that hire corps of CFPs to provide advice to clients.

When you look at it that way, several things become clear.

First, the key distinguishing factor that makes one a robo is apparently great technology that allows clients to do more of the driving, both in their initial exploration and setup of their accounts, and in the ongoing servicing of those accounts.

Second, while a robos appears to be a great technology model, it doesn’t appear to be a great business model, at least as of yet. The self-directed robos are offering a glorified E*TRADE account with a nice user interface, a bundle of pre-built transactions you can execute in a click, and automatic reinvesting and rebalancing technology.

A segment of the market appears to be willing to pay 25 basis points for that, but the customer acquisition costs are rumored to be $825 for a customer averaging $63 in annual revenue. The self-directed robos are stuck — raise their price, and watch CAC skyrocket, or lower their price and watch revenues and long term customer value fall like a rock.


Third, customers actually value human advice. While some firms may attempt to compete on cost, there are a large number of them achieving substantial growth without cutting prices. It’s similar to what has happened to tax preparation.

Sure, a chunk of the market likes to pay $35 for self-directed tax prep (it’s called TurboTax). But somewhere around four times as many people are willing to pay 8-10x more money for the H&R Block model of human driven, technology assisted tax preparation.

Why? Because taxes are complicated (consumers don’t want to figure it out) and important (consumers don’t want it getting messed up). And the good news for advisors is, wealth management is equally complicated and important.


Finally, it’s become clear that the self-directed robos aren’t actually providing advice, contrary to their PR spin. Even when an advisor leverages scalable portfolio allocation and asset management, they are still playing the role of behavioral coach and financial consigliore to their clients. They are assessing each client’s unique circumstances and advising them differently on that basis.

Find me the robo advisor who tells a 23-year old college graduate to skip investing their $25,000 and pay down their student loans instead. Find me the robo advisor who can understand how low a client’s Risk Number is and advises that client to pay off their mortgage for peace of mind, instead of putting their cash in no-yield bonds.


At some point, the robots may become sentient and capable of providing true advice. But until then, the robos with call centers filled with customer service agents are simply not advice firms. They’re self-directed investing services that charge 25 basis points instead of $9.95 a trade.

Bottom line? Advisors need to create speed and scalability and drive down cost and complexity, when it comes to the portfolio allocation and asset management functions in their businesses.

That will leave precious time for them to focus on the places they add value — the behavioral coaching, financial life planning and tax assistance that consumers have already proven they need, and are willing to pay for.

And that’s a bright future for both advisors and the investors they serve.

Aaron Klein is CEO of Riskalyze.

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