July 8, 2015
by Michelle Perry Higgins
Robo advisers have recently gained a lot of publicity and seem to be the cat’s meow of the investment world, at least for now. But are they really a tsunami that will devastate the ranks of conventional financial advisers and traditional financial advisory firms? Or are they a flash-in-the-pan phenomenon, destined to fall by the wayside after the novelty wears off? It seems likely that both of these positions are misconceptions and the truth lies somewhere in the middle.
Robo advisers combine two aspects that, together, enable them to claim a differentiated presence in the financial marketplace. These two aspects are an online presence along the lines of E*Trade and automated tools that put into practice the precepts of Modern Portfolio Theory in assembling investment portfolios. The online presence makes them accessible to investors and the automation of the portfolio decision makes them available at low cost to a mass market. As a result, robo advisers have recently been collecting assets at a rapid rate.
But is this the end of the financial-advisory profession? Probably not, but there is little doubt that these relatively new players will have an effect. What that will be is still uncertain, but what is certain is that it is unlikely that they will sweep the field. For one thing, their major appeal, so far, has been to newer investors with relatively small portfolios who don’t yet have the minimum amount to be the target of traditional financial firms. Whether the robos will be able to move “upstream” in any significant way is still unknown. It may be that as their wealth grows investors will feel the need to utilize the services of a sophisticated financial adviser who can take into account the totality of their increasingly complex financial circumstance.
However, the one thing that the robos have done is to highlight the fact that for many investors, the asset allocation decision has become commoditized to a great extent. Financial advisers can still provide that service, but to thrive they need to go beyond emphasizing the role of asset allocator in their practice. They need to emphasize the human touch, judgment enhanced by experience, and other qualities that machines still cannot provide, such as providing a steadying influence during bear markets. For these kinds of advisers, the robos will have a hard time making a dent.