Fear Being Replaced by a Robot? How to Thrive Against Robo Advisories

“Robo advisory” is the internet interface of investing, a new breed of online financial advisors who use computer models and algorithms to both design and manage investment portfolios. Successfully competing in this new investing environment will demand:

  • An understanding of the power of branding in professional services and development of the marketing tools necessary to build and support your brand;
  • Commitment to increased scalability through use of increasingly sophisticated technology; and
  • Multichannel delivery systems with a multigenerational and multitalented advisory team to straddle the growing age range and preferences of profitable investors.
  • “It is change, continuing change, inevitable change that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.” — ISAAC ASIMOV

    Maybe nowhere is Asimov’s advice more apropos than in the wealth management industry today. Financial advisors face mounting challenges in all phases of their business, from scalability and pricing issues to paradigm shifts in client behaviors and expectations. Time-tested business models are being questioned due to enhanced technological innovation, increasing availability of big data and the stunning, continued growth of the number of financial products available.

    Perhaps none of these issues has received as much scrutiny for its disruptive power as the rise of the so-called “robo advisory.” Speculation that computers may make human advisors obsolete has attracted major media attention. Venture-capital-backed robo startups are proliferating. Whether the opinion of the majority of investors will shift — and is followed by action — remains to be seen. Nevertheless, even though high-net-worth investors are currently the lifeblood of the professional advisory business, next-gen investors are coming of age and cannot be ignored. The “mass affluent” population next-gen investors now represent in large numbers is a powerful source of potential growth for these high-tech online advisors.

    There is no question that the times, as Bob Dylan sang, “they are a changin’.” Is your practice prepared to meet the challenge? Here’s how you can respond to this new competitor and even thrive in the new wealth management landscape.

    What is Robo Advisory?

    You may have read the headlines about financial analysts and advisors being “replaced by robots.” What exactly is this new upstart technology?

    Simply put, robo advisory is the internet interface of investing. A new breed of online financial advisors uses computer models and algorithms to both design and manage investment portfolios. Many provide automatic portfolio rebalancing and tax-loss harvesting; some offer “hybrid” services for larger investors, adding in a human advisor who can assist with detailed portfolio reviews and fund selection processes. Common among them is that all have lowered the bar on investment minimums.

    Starting an investment relationship with a robo firm often begins with a simple online questionnaire that establishes goals and objectives as well as tolerance for risk. Coupled with vastly different gradations of service, access and interactivity, it is somewhat difficult for individual investors to determine the best choice for their needs.

    In addition to the savings inherent in their automated business models, robo advisors tend to invest in vehicles such as exchange-traded funds (ETFs).

    A decreased cost for investing plus the ease of online access present an acknowledged attraction for some investors. But what else is driving this swift rise to notoriety? And what can we expect the growing impact to be? First, let’s set some context.

    Who Uses Robo Advisors?

    The most commonly reported characterization of a robo advisor’s target is the mass affluent and mass market investor who doesn’t meet the typical minimum investable assets criteria of professional financial advisors and fiduciary managers. These individuals are, on average, younger; very technically savvy; value ease and convenience; and don’t mind getting investment advisory services online or via an interactive voice response (IVR) without any human intervention. 1

    Corroborating that view are descriptions of client bases from two of the more successful robo advisor startup firms: 2

  • Firm 1 – 75% of clients are younger than 50, with an average age of 30-something and work as professionals earning approximately $150,000 per year; fees range from 0.15% to 0.35%, depending on account size
  • Firm 2 – 90% of clients are under age 50; 60% under 35; no advisory fees are charged on the first $10,000 but larger amounts of assets under management are charged 0.25% Research shows, however, that digital channels should not be thought of as only for Gen X and Gen Y. Boomers own their fair share of tech devices and should not be ignored. 3
  • One of the surprising turns many upstart robo firms are taking is offering their low-cost automated services to financial advisory firms. Other robo firms have begun to offer their own staffed advisory platforms, creating hybrid high-tech/high-touch offerings that may appeal to younger boomers as well as Gen X and Millennials as these groups accumulate wealth and develop more complex asset management needs.

    The Evolution of the Investment Management in Industry

    The investment management industry has undergone serious change across several decades, but no more so than the game-changing developments of the last several years. The recent bull market has been a key driver fueling the changes along with increased regulation, changing consumer behavior, advancements in technology and a dramatically more complex competitive landscape. 4

    Regulatory Challenges

    Reaction to the 2008 financial crisis produced an unparalleled level of regulation. New and complex requirements affect a wide range of issues from capital and liquidity requirements to offshore investments and tax and income transparency.

    Changing Consumer Behavior

    The aftermath of that crisis caused a paradigm shift in clients’ views of the financial services industry. Investors in all demographics are becoming more pragmatic and are searching for knowledge, credibility and visibility into their portfolios.

    This is especially true among the Gen Y or “Millennials” segment, the generation coming of age in the 2000s. The largest age cohort since the Baby Boomers, it is being aggressively solicited by many large financial services providers as well as robo firms. Though they are more financially literate than older investors — and connected to news, information and each other to an unprecedented degree — they are also the most cynical when it comes to financial advice. As demographers and market historians point out: they were children when the NASDAQ bubble burst in 1990 and most were in college for the 2008 explosion as they watched their parents’ investments fall at a speed the industry had never seen. 5

    Consumers’ daily experience online also contributes mightily to the impact on the wealth management profession. Google, Amazon, Facebook, et al, fuel client expectations of instant connection, selection and gratification, any time, any place, via any device. And social media enables anyone to share their investing experience (including their advisor’s performance) with peers.

    The Acceleration of Technology

    Another key factor is the quest for artificial intelligence or AI, the intelligence of machines that is fueling disruptive change across several industries. At present, there is said to be more than 143 firms working in artificial intelligence in Silicon Valley alone.

    In 1997, the IBM computer Deep Blue bested world chess champion Gary Kasparov using what is today thought of as rather “simple” if-this-then-that programming. In 2011, IBM’s “cognitive computer” named Watson, competed against the two all-time top winning “Jeopardy!” competitors — and won. That required the computer to understand the game’s answers, which are posed in natural language, search its massive database to find (or actually more accurately, build) the correct response, format it as a question to comply with game rules, and do it in record time to beat the other contestants to the buzzer. The machine’s performance displayed a level of artificial intelligence scientists had been trying to achieve for years. 6

    Forms of such AI at work —“robo” services, if you will — are everywhere, some more transparent than others. Can it be any surprise that AI is now at work in investment management?

    Could the Human Voice Be Replicated?

    Can consumers actually suspend their disbelief and accept computer-generated content as easily as they would human responses? The answer is, they do it every day but may not realize it.

    Automated content generation is becoming the norm on the Web, on newswires, in newspapers, books and even on Wall Street. Sophisticated algorithms and natural language generators are behind a stunning number of news reports and articles published every day to audiences who admit they cannot tell the difference between “robo journalism” and content composed by humans. An example from two sports reports:

    “Things looked bleak for the Angels when they trailed by two runs in the ninth inning, but Los Angeles recovered thanks to a key single from Vladimir Guerrero to pull out a 7–6 victory over the Boston Red Sox at Fenway Park on Sunday.”

    “The University of Michigan baseball team used a four-run fifth inning to salvage the final game in its three-game weekend series with Iowa, winning 7–5 on Saturday afternoon (April 24) at the Wilpon Baseball Complex, home of historic Ray Fisher Stadium.”

    Which is which? The first was generated by machine, the second by a human. 7 The Associated Press uses a platform called Wordsmith to “write” more than 3,000 financial reports per quarter. The Los Angeles Times uses Quakebot to analyze geological data and Homicide Report for murder reporting, and Quill from Narrative Science is now generating financial reports for T. Rowe Price and USAA, among others. Even the CIA uses bot content generators. 8

    The software gets better every year. Quill can actually take direction to “angle” a story for certain audiences, such as softening the blow of a loss by a beloved sports team for its fans. 9 Kristian Hammond of Narrative Science estimates that 90% of news could be generated by robot journalists by 2020. 10

    The “content” that online robo advisors deliver via algorithms happens to be portfolio designs, currently based on rather straightforward suitability questionnaires. Given rapid development in AI, however, how long before they are able to respond to behavioral nuances of their clients — just like a human?

    The New Competitive Landscape

    While the major full-line brokerage houses continue to invest heavily in enhancing their web presence and level of interactivity to attract and retain clients, the new, do-it-yourself robo business models are gaining traction among retail investors. These disruptive entrants are appealing to certain investor demographics and psychographics by delivering investing experiences that meet the information and service expectations of many “new age” consumers.

    The race to leverage new technology and capitalize on changing consumer sentiment is opening doors for very well-funded nontraditional startups to infringe on a once very exclusive club. This is different than the online trading environment in the 1990s because:

  • Regardless of age, more people are comfortable with internet bill pay, research and access to information that informs their purchases; and
  • People tend to trust the Internet above a human being. There is a belief among many investors that algorithms don’t lie and are unbiased.
  • The Investment Industry Response

    The industry response to all these environmental forces is nearly uniform.

  • A trend to using big data to define market segments (e.g., level of risk tolerance, wealth measures, life stage)
  • Increased investment in web presence and level of interactivity, not only to engage client and prospects but also to meet new regulatory requirements in a cost-efficient manner
  • Close examination/reevaluation of service offerings and pricing
  • Heavy focus on operational efficiency to protect margins from erosion
  • Full-service firms reiterating the value of human advice
  • The implications for investment advisory point to downward pressure on margins and a dramatic alteration in business as usual. The question becomes whether you need to buy robo advisory services for your clients, and if not, how you immunize your practice against the perceived competition. Following are several key best practices for consideration.

    What Can You Do To Protect and Grow Your Firm

    Successfully competing in today’s investing environment will demand:

  • An understanding of the power of branding in professional services and development of the marketing tools necessary to build and support your brand;
  • Commitment to increased scalability through use of increasingly sophisticated technology;
  • Multichannel delivery systems with a multigenerational and multitalented advisory team to straddle the growing age range and preferences of profitable investors; and
  • Building unique portfolios differentiated from those available at robo advisory firms.

  • Your Brand is Your Promise — Build it and Promote it

    First, reevaluate who you are today, what you want to become tomorrow and where you fit — or aspire to fit — in the range of advisory service models. As Exhibit 2 illustrates, the more comprehensive and customized your offerings, the better your opportunity to truly differentiate yourself in an increasingly competitive world.

    Please click here to read the full white paper.


    1 The Race to Easy: Reevaluating the Wealth Management Technology Strategy. Aite Group for Scivantage. March 2015.
    2 O’Brien, Sarah. “Robo firms gaining traction with traditional advisors.” CNBC.com. April 17, 2015. Accessed May 12, 2015 at http://www.cnbc.com/id/102566495
    3 The Race to Easy: Reevaluating the Wealth Management Technology Strategy. Aite Group.
    4 Gemes, A, Lenzhofer, A, Azad, S, Diemers, D. Global wealth management outlook 2104-15. Strategy & (formerly Booz & Company), member PwC. 2014.
    5 EYGM Limited. Global wealth and asset management industry outlook. 2014.
    6 Markoff, John. “Computer Wins on ‘Jeopardy!’: Trivial, It’s Not.” The New York Times. February 16, 2011.
    7 Podolny, Shelley. “If an Algorithm Wrote This, How Would You Know?” The New York Times. March 7, 2015. 8 Simonite, Tom. “Robot Journalist Finds New Work on Wall Street.” MIT Technology Review. January 9, 2015. http://www.technologyreview.com/news/533976/robot-journalist-finds-new-work-on-wall-street/ Accessed May 12, 2015
    9 Ibid.
    10 Podolny, Shelley. “If an Algorithm Wrote This, How Would You Know?”