With the rise of financial apps such as Betterment and Acorns, much of the hype around robo-advisors and related technologies is well deserved. Robo-advisory apps make aspects of investing more accessible, more seamless and less costly. But as robo-advisory technology matures and a new generation of investors emerge, it’s becoming apparent that automation won’t seize control of the investment world anytime soon.
The majority of the 210 new billionaires that emerged in the past few years said they prefer to have family offices manage their finances, a recent Bloomberg study found. Although you might not think this says anything about the rest of us, this preference is actually reflective of most investors. Whether their portfolios are big or small, most investors prefer hands-on, white-glove, personalized advisory services. But can they afford it?
Although many people use robo-advisors simply out of cost and convenience, the productivity of these apps, services and software will eventually plateau out. We have seen spectacular growth and progress in robo-advisory technology, but as its productivity levels off, the industry will need to find ways to integrate it with the human elements that clients want in their advisories.
The Effects Of A Down Market
Robo-advisors came into existence only after the 2008 financial crisis, a fact that is often overlooked by advocates of this technology. To understand the quality of any advisor, robo or human, it’s necessary to see the advice they give in a bear market. We’ve been on a bull run for just shy of 10 years now and it’s easy even for computers to advise under that market trend. However, when the market inevitably falls again, robo-advisors will find themselves tested under extreme circumstances.
Human instinct is to sell when a dramatic price drop approaches, but traditional wisdom tells us this is generally a poor approach leading to massive losses. Technology is equally fallible and without the perspective of a seasoned advisor, it will be incredibly difficult for robo-
advisors to properly advise during negative conditions.
All of this is not to say that robos cannot perform during a down market, but their abilities won’t be fully understood until they face one. The likely pairing of human and robo-advisors will come when the two find a way to offer cohesive advice during less than ideal economic circumstances.
Robos Are Limited In Emotional Intelligence
One of the most important things to recognize about robo-advisory apps is that they merely provide a bare-bones service. They can only execute trades, manage portfolio allocation and perform other basic, narrow activities. But when it comes to investing, clients and advisories are starting to place more emphasis on emotional quotient, or EQ. EQ focuses on helping clients manage their emotional state, discover their emotional strengths and weaknesses, and ease through turbulent financial periods.
There’s no denying that there are certain tasks that robo-advisors perform well. However, helping a client develop and manage their EQ is not one of them. Although there has been some progress in financial apps — for example, some budgeting apps send out a message when the user spends too much on fast food — for now, robo-advisors aren’t sophisticated enough to help clients manage their emotional state on a daily basis. Even as the functionality and intelligence of robo-advisories progress, they will likely become more of a supplement to helping clients manage their EQ, not a full-fledged replacement for a financial professional.
Demographics Favor Human Advisors
Much has been made of the “greatest wealth transfer in history,” as the baby boomer generation passes down their savings, assets and accumulated wealth to millennials (and, to a lesser extent, Generation X). We often have a stereotype of millennials being distrustful of legacy financial institutions, and we assume that they prefer to interact with a smartphone instead of a human being.
However, this story is changing drastically. As millennials mature, they’re realizing that no single app can handle investments, taxes and estate planning on an individualized basis.
Moreover, many investors and clients age 40 and older are reluctant to turn their entire financial lives over to robo-advisors. And as financial advisories begin integrating more services under one roof and coaching clients in EQ, the value-added proposition for robo-
advisors isn’t as strong as it once was.
If there’s one thing that’s true about the millennial financial consumer and the rewired investor, it’s that they have a DIY mentality. In the future, it will be advisories that enhance and enable investors, equipping them to make better decisions on their own. Robo-advisors will still participate in this process, but will work in concert with, and not in replacement of, human advisors.
The Family Office Is Democratizing
The U.S. will gain about 1,700 new millionaires each day between now and 2020, according to Bloomberg and Boston Consulting Group. Although a million dollars may sound like a lot of money (and it certainly is), traditional white- glove, family office services normally have been out of reach for even those individuals. Most investors have had to choose between paying exorbitant fees for a family office (assuming they even meet the minimum investment requirements) or handing their investments over to a mutual fund or robo-advisory service.
But innovation and technology are changing all that, and a new segment of democratized family office services is beginning to slowly (but steadily) emerge. Family offices are recognizing that by integrating robo-advisory intelligence and technology, they can offer white-glove advisory services at a more affordable rate. Family offices can leverage robo-
advisors in areas like automation of portfolio allocation and trade execution, while also providing clients with human consultation and empathy, which is especially important during times of market turbulence or when a client is making a big financial decision.
Robo-advisor technology has done much to lower the barriers to entry for many financial services. But the robo-advisor also is hitting its ceiling as a digital assistant, as it’s only capable of carrying out basic tasks and automating certain aspects of the investing process. As human advisories integrate EQ into their services, and as the family office model becomes accessible, robo-advisors will supplement the work human advisors do, not replace it.
David Miller, CFP, is CEO of PeachCap. Miller is a progressive thought leader in the financial services industry, where he has been an integral connector in helping the industry bridge generational disconnect. He may be contacted at [email protected]