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How the Robo Versus Human Adviser Dynamic Has Shifted

Written by: Ben Cooper

The discussion surrounding how robo-advisers fit into the broader financial advice landscape has been widely debated for years.

Over time the conversation has taken many turns, and robo-advisers are not discussed the same way today as they were when they first appeared on the scene.

Certain predictions surrounding how robos would change the industry haven’t played out exactly as expected, but some aspects are the same: they still resonate with investors seeking low costs and limited involvement in their personal finances. But one thing is for sure, robo-advisers are here to stay and continue to chip away at the overall market share of investable assets. Research firm Cerulli Associates predicts robo-advisers’ total AUM will rise from approximately $18.7 billion to as much as $489 billion by 2020.

We at Gregory FCA have been following robo-advisers and their impact on the advisory landscape since the beginning. Roughly two years ago, my colleague Joe Anthony authored a post on this blog discussing the threat of robo-advisers to the traditional business model. A lot has happened since this post originally debuted, and in the spirit of #TBT, we thought it’d be worthwhile to take a look at how the discussion around this dynamic has changed.

1. Fee compression is not happening as anticipated.

Robo-advisers provide their services at a fraction of the cost of their human counterparts. When robos first emerged, the logical consensus throughout the industry was that human advisers would have to reduce their fees to compete with these low cost alternatives. However, as industry influencer and friend of the blog Michael Kitces writes in a recent post , the average advisory fee as a percentage of AUM actually rose to 78 basis points in 2016 from 72 basis points in 2014. Profits among human-based advisory firms did drop in 2015, but as Kitces points out it was largely attributed to market performance, not declining fees.

2. Robo performance has varied widely between firms.

At the onset, there was much to be said about the sophisticated formulas behind the algorithms picking investments for robo-advisers. However, there was little in terms of a proven performance track record . New research suggests annual returns vary widely between robo-advisory firms. Financial advisory firm Condor Capital tested this theory by investing $10,000 at 13 different robo shops with an asset allocation of 60 percent stocks and 40 percent bonds. Throughout the first eight months of this year, net returns varied widely, ranging from 9.36 percent at Schwab Intelligent Portfolios and 4.64 percent at Wealthfront.

3. Technology’s affinity with all ages and the emerging middle ground.

It was originally predicted that the adoption of robo-advisers would skew almost entirely toward the millennial demographic. While millennials are still the group most likely to replace a human adviser with a robo service, new research from LinkedIn and Greenwich Associates suggests older and high-net-worth demographics also have a strong affinity toward digitally-enabled financial advice. However, this isn’t to say they will entirely replace their adviser with a fully-automated service offering. Instead, they want the best of both worlds. Advisers supplementing their services with online portals, mobile notifications and 24/7 access to their financial information are gaining the most traction with these demographics.


What we expect for the future

Human advisers are not going away, but they must justify their fee and demonstrate their value in the financial planning aspect of their business. The clear differentiator for human advisers remains the judgment and perspective he or she imparts in the financial planning process. However, we expect digitally-enabled human advisers that complement their service offerings with technology will do a better job engaging clients and managing their practice, while the improved technology will replace more parts of advisers’ day-to-day work.

The best way for advisers to stay relevant is to creatively implement technology to boost convenience. Distinguish yourself with a good story and position your marketing campaign in a way that accentuates your value proposition as it relates to your technological capabilities. This will become increasingly important as clients’ desire for technology continues to grow.