Automated solutions won’t render a profession obsolete.
Many people ask me what I think of roboadvisors - the many automated investment management sites that have emerged over the past few years. On the investment side, robo-advisors aren’t breaking new ground. What impresses me, though, is what they have done with user engagement. They’ve created compelling user interfaces that are written in a friendly, casual voice with clear explanations. They make investing more accessible and less intimidating. I’m a design fan, and many of these offerings have done an excellent job with it. They’ve made investing more enjoyable and easier to fit into your digital life.
Is this another instance of technological disruption that will render a profession (in this case, financial advisors) obsolete?
I don’t think so. Robo-solutions work well for those early in their careers when their financial affairs are often simpler. As people age, their financial lives inevitably become more complex— there may be a divorce, a special-needs child, care of elderly parents, insurance needs, annuities, housing assets, Social Security, estate planning, and other factors to consider. At that point, people highly value working with a financial advisor who can put together an appropriate financial plan. It’s hard for a computer algorithm to take into account the multitude of possible individual situations and create a plan in a way that engenders trust. By Morningstar estimates, the value of financial planning is significant—it can provide an additional 1.6% of return per year.
There’s also the emotional and behavioral aspect to investing. If the market plunges, investors often want to speak to someone. Logging on to a website and interacting with an online tool may not suffice. The future of the financial advisor is secure and arguably more important than ever.
Hybrid Sweet Spot
That said, robo-advisors are good for the investment industry and here to stay. They’ve put people into sensible portfolios that are low-cost and diversified with regular rebalancing. They should produce reasonable, index-like returns over time. It’s not revolutionary, but does fill a market need. Many investors who use these services have few alternatives. They have low account balances that are too small for financial advisors. Robo-advisors can step up to fill the advice gap and get people investing earlier in their careers.
Over time, robo-advisors may add financial planning capabilities with artificial intelligence features to enhance their appeal. We’ll see them evolve to hybrid solutions that incorporate licensed advisors into their solution via phone and video. One example of a robo-advisor doing this today is Personal Capital.
We’ll see financial advisors use robo-tools to manage their smaller accounts. Instead of being harmed by technology, financial advisors can turn the tables and leverage it to expand their practices. We’ll increasingly see robotechnology built into advisor platforms and asset management firms offering robo-solutions to their distribution partners.
Robo-advisors also will add financial planning capabilities to move up to larger accounts, and financial advisors will add robo-tools to move down to smaller accounts. The sweet spot may well be the hybrid solution that integrates robo-tools with licensed financial advisors.