Why Robo-Advisors Will Have Issues Maintaining the Trust of Their User Base
Robo-only advisors have recently been very successful at raising new capital and focusing their resources on winning over millennials. Therefore, we find it timely to discuss the client’s historical need of a financial adviser. While the understanding of clients’ risk tolerances that robo-only advisors provide is undoubtedly an important part of investing, it remains only part of the picture. Of equal importance is taking into account the risk tolerance of investment markets and how this may impact the client’s financial profile. Regardless of how much risk a person can afford to take, no one wants to enter an unstable market environment only to discover that he or she did not adequately account for his or her entire financial situation.
The Singularity of the Individual
Robo-only advisors can judge a client’s risk tolerance very accurately if the client understands his or her goals, priorities, and situation very well. But how often is this truly the case? Clients often require more complex guidance as they crystallize their aims. A robo-only advisor is incapable of providing this type of guidance. It is not a stretch to believe that the narrow range of environments in which robo-only advisors excel will be a mitigating factor of their success.
It is understood that robo-only advisers are built by very intelligent people, but it appears that these engineers have forgotten the informal definition of an engineer: Someone who performs precision guesswork based on unreliable data provided by those of questionable knowledge. In their present structure, robo-only advisors are not equipped to blend the client’s risk with market risk, both of which are dynamic. Because of this, there is ample reason to think they will have issues maintaining the trust of their user base.
Drawing on my past experience investing in the technology sector, I realized that the objective of technology is to spare people from performing mundane, repetitive tasks. Most innovation drives an increase in productivity by mechanizing repetitive functions that people do by hand. Think about TV dinners: Hot meals are time-consuming and costly to make, but because of the development of microwavable dinners, you simply have to unpackage a meal and pop it in the microwave to have a hot dinner ready. Viola!
However, this type of standardization only works when cooking and eating are viewed as tasks or chores. Tastes change, and most people don't want to eat the same thing over and over again (Unless it’s pizza — everyone loves pizza). People seem to crave “homecooked” meals, despite the ready availability of microwavable meals. When it comes to food, most of us crave quality and variation. TV dinners fail to account for some people’s desire for customization and craftsmanship.
Technology has proven highly effective at mechanizing the repetitive functions that hinder our day-to-day lives. It fails, however, at dealing with the exceptions to the rule. Human input, thought, and effort are required to handle tasks that are fluid, unpredictable, and complicated. Unlike people, robo-only advisors cannot easily adapt to new situations, hindering them in any environment that is not static and controlled.
Investing is built on singularities. Every individual has his or her own risk tolerance, return objectives, tax consequences, and family situation that need to be matched to the risks within the markets. The robo-only advisors’ strategy of forcing every investor into predefined buckets no matter the market environment may function when working with millennials, who are in the early years of saving and have adequate time to recover, but it trivializes the priorities and the circumstances that make us all unique.
I Have A Brand And It Haunts Me
I was talking to my pal “Jonas” who recently decided to freelance (vs building a multi-consultant business) when he left a bigger firm to do his own thing.
Jonas is a global talent guy who works across the planet for some of the world’s most well known companies. He decided his best play—the one that would allow him to focus on what he loves most and live the life he’s planned—is to freelance for other firms.
His plan got off to a bit of a rocky start because—get this—none of the firms he approached believed he’d actually want to “just” freelance. He’d earned his rep by steadily building deep, brand name client relationships, practices and business, not by going off by himself as a solo.
Or as he put it “I have a brand and it haunts me.”
We both had a good belly laugh because he was already rolling in new projects, thrilled with his choice to freelance.
And yet, isn’t that the truth?
Good, bad, indifferent—our brands DO haunt us.
They whisper messages to those in our circle “trust him, he’s the bomb”, “hire her for anything creative as long as your deadline isn’t critical”, “steer clear—he talks a good game but doesn’t deliver”.
And thanks to social media, those messages—good and bad—can accelerate faster than you can imagine. One client, one reader, one buyer can be the pivot point that takes your consulting business to new territory.
So how do you deal with it?
Yep—you go for more of what comes naturally. In Jonas’ case, he stuck with what he’s known for—his work, his relationships, his track record for integrity—and won over any lingering skepticism about his move.
We weather the bumps in the road by staying true to who we are at our core.
So when a potential client says “Sorry, you’re just too expensive for me”, you don’t run out and change your prices. Instead, you listen carefully and realize they aren’t the right fit for your particular brand of expertise and service.
When a social media troll chooses you to lash out at, you ignore them and stay with your true audience—your sweet-spot clients and buyers.
And when your most challenging client tells you it’s time to change your business model to serve them better, you listen closely (there may be some learning here) and—if it doesn’t suit your strengths—you kiss them good-bye.
If your brand isn’t haunting you, is it really much of a brand?
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