Why Robo-Advisors Will Have Issues Maintaining the Trust of Their User Base

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.

 

Joseph Hosler
Market Strategist
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Joseph Hosler, CFA, brings 21 years of investment experience serving the needs of large institutional clients. His background includes portfolio management and investment anal ... Click for full bio

NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work

NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work

Written by: Jon Sabes

When you meet Carl Landry, stand-out college basketball player and nine-year NBA player, you imagine that becoming a professional basketball star was a straight forward run for the 6-foot-nine-inch power forward. 


However, when you go deeper into Carl’s background, becoming a NBA professional was less than certain and little came easily to the 33-year-old from Milwaukee:

  • He was cut from his high school team as a freshman and averaged less than ten points a game when he did play as a senior.
  • He started his college career not at Purdue, but a junior college where it was not clear he would play.
  • When he finally got to Purdue, he tore his ACL in his knee his first year and reinjured it the next year.
  • While his family held a party for him the night of the NBA draft, he slept in the Philadelphia airport after missing a flight following a workout for the 76ers.
  • In the NBA playoffs, Carl had a tooth knocked out, but came back in the same game to make a game-winning blocked shot as the Rockets beat the Utah Jazz 94-92.
     

Landry, who I interviewed on my podcast, Innovating Life with Jon Sabes (www.jonsabes.com), is a remarkable example of the value of “persistence.” In a time where technology creates the image that anything is possible at the touch of a button, persistence is an under-appreciated trait. When I spoke with Carl, I clearly saw someone for whom success has only come through a force of will that made him a NBA player, but it also made him a better player every year he played. That’s the kind of personality that has produced greatness in business as well as sports.

Carl was, in fact, drafted that night he spent in the airport. The Seattle Supersonics chose him as the 31st overall pick and then traded him to the Houston Rockets where he rode the bench for much of the first half of the season. When All-Star teammate Yao Ming was injured, he stepped in and played a key role in the Rockets astonishing 22-game winning streak (the third longest streak in NBA history). And, that season, after sitting on the bench for 33 of the first 36 games, he was named to the All-Rookie second team.

Carl was the first in his family to go to college. “I told myself that this was my ticket out, so I did everything I possibly could to be the best person in school and also on the court,” he said.

His family life in Milwaukee showed him what he didn’t want to do. “Just being honest with you, seeing some my cousins, peers, they went to work for jobs paying six, seven dollars an hour or they didn’t go to work at all and then living off welfare. I didn’t want that.”

When he was first injured, he had to contemplate the end of a career before it even got started. “When you have an ACL tear, it’s over…no more basketball,” he told me. “I said, God, give me health again and I’ll do everything I can to leave it all out on the line and be a successful individual.”

On my podcast, Carl pointed out another interesting lesson he learned in the NBA: Not doing things just to fit in.

“Fitting in was easy,” he said. “Doing everything that everybody else does was easy. If I stood out in some type of way, I’m going to have different results. I’m going to have stand-out results.”


That’s called the “Law of Contrast” and it produces that exact effect of changing the outcomes that everyone else is experiencing.  Carl is smart, he recognized that differences make a difference, and doing whatever it takes is what is required to make real, meaningful differences.

Every off-season for the last 11 years, he has run a camp for kids in Milwaukee where he tells youth his story of hard work and persistence. “I always tell the kids to apply themselves and always be persistent,” he said. “If you dream, apply yourself and be persistent. With hard work, man, the sky’s the limit.”

When Carl says the sky’s the limit he means it.  He is smart to recognize that it’s important to dream big, because if we don’t – we may be selling ourselves short. “You have to dream bigger than your mind could ever imagine,” he said. “I wanted a nice house. I wanted a nice car. I said, and I got all of that. So, what do I do, do I stop now? Maybe I didn’t dream big enough.” That’s a big statement coming from a kid who grew up to be the first in his family to graduate college and go on to be not only a top NBA basketball start, but a good businessman, father and someone who gives back to the community.

I’m convinced that in whatever he takes on as a basketball player or in his post-hoops career, Carl Landry is not going to stop getting better at whatever he does, and in the process of doing so, make the world a better place.

GWG Holdings, Inc.
Investing in Life
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GWG Holdings, Inc. (Nasdaq:GWGH) the parent company of GWG Life, is a financial services company committed to transforming the life insurance industry through disruptive and i ... Click for full bio