Why investors and advisors should embrace Robo-Advisors

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Rick Hyde pic Mar 2015
Rick Hyde

 

By Rick Hyde, Founder & CEO, Ticoon Technology

Special to the Financial Independence Hub 

Open any financial publication these days and you’ll likely find an article about robo-advisors accompanied by an image of a robot doing something with your money – ‘The robo advisors have arrived” or “The rise of the machines” or “Invasion of the robo-advisors.”

Robo-advisors, a.k.a. automated portfolio management tools for retail investors, have most certainly arrived and they are poised to have a significant and, I would argue, largely positive impact on the investment business – both for advisors and investors.

The Meteoric Rise of Robo-Advisors

The top three US robo-advisors – Wealthfront, Betterment and Personal Capital – have each now topped the $1 billion mark for assets under management. And from April to December of 2014, the 11 online investment services tracked by Corporate Insight grew assets under advisement or management by 65% or a total of $19 billion. (See Can Robo-Advisors Survive a Bear Market?)

This kind of growth is not lost on venture capital investors. In 2014, robo-advisors took in over $290 million in venture-capital funding – double the total in 2013 and more than 10 times that invested in 2010. (See Investors snap up online financial advisers.)

In Canada, several robo-advisors have launched – including NestWealth, WealthSimple and Wealthbar – and are making headway attracting investors looking for robust portfolio management tools and lower cost investing options. (See: ETF Investing Services.)

Challenges Facing Robo-Advisors

Despite the momentum behind robo-advisors, there are challenges ahead.

For one, investors need to have a certain degree of financial knowledge and savvy, on the one hand, as well as a comfort with technology, in order to confidently manage their own portfolios using self-serve robo-advisor tools. While younger generations of investors, so-called digital natives, may bring technology savvy, they don’t necessarily come with financial literacy.

There is also a growing concern for about well robo-advisors will weather a significant bear market, since most online offerings have emerged in the bull markets following the Great Recession of 2008-09. The test of any investor (and advisor, for that matter) is how they behave in a down market and the jury is still out on robo-advisors.

Then there are the challenges building a trusted brand from scratch in an industry where even the traditional brands are struggling in the trust department. Customer acquisition costs can be high and, as Charles Schwab and Vanguard recently demonstrated, it’s not that hard for established brands to build their own robo-advisor services and leverage their existing client relationships when they feel the time is right.

Rise of the ‘Bionic’ advisor

To date, there has been a preoccupation in the advice industry with the question of whether robo-advisors spell the end of the human advisor. But this is the wrong question.

 “The future isn’t about robots versus humans, where one wins and one loses. I believe that the future will see a ‘bionic’ solution – part man, part machine – where, ultimately, the investors come out far ahead of where they are now.”

~ Randy Cass (founder of NestWealth) in Rise of the Machines

Robo-advisors on some level need human advisors. And human advisors need the robo-advisors.

Robo-advisors have been very good at automating investment processes that are relatively simple and can be commoditized. However, when financial planning and decision-making gets complex, investors need a place to turn for help. For sophisticated investors, their peers can take them a lot of the way. But for most retail investors, a human advisor can help them manage the most challenging issue in investing: the behaviour of the investor.

Make no mistake, robo-advisors are transforming the advice industry. Robo-advisor technology is changing what investors expect from their retail advisors in terms of real-time access, self-serve options, and rich on-demand reporting.

At the same time that robo-advisors are enriching the technological experience of investors, they will contribute to the growing downward pressure on fees charged by advice providers. Advisors will be forced to deliver more value to investors for their fees, while delivering the most commoditized services more cost effectively, i.e., by using automated tools themselves (i.e., robo-advisors) to help manage their clients’ investments and portfolios.

Wake-Up Call for Financial Services Industry

Robo-advisors are the best thing to happen to investors and the advice industry in a long time because they force everyone to up their game.

Investors are getting more options for managing their investments cost-effectively and accessing the advice they need, regardless of the size of their portfolios.

Advisors are getting a much-needed wake-up call about where their industry is headed. Integrating sophisticated automated services with access to human advice fills a growing need to provide investors with a unified platform for managing their financial affairs. And why stop at investments? Why not incorporate insurance and banking products such as mortgages into a convenient, one-stop platform that gives both the investor and advisor a comprehensive, 360-degree view of their financial situation at any given time?

Financial systems are undergoing technological change at a more rapid pace than any other time in history. An integrated robo and human advisor approach is a model for delivering the better advice and services for investors.

Rick Hyde is the founder and CEO of Ticoon Technology. For almost twenty years, Rick has been designing and implementing web-based wealth management and financial data solutions for North America’s leading financial services firms. Follow Rick on Twitter @RickHydeTicoon.

 

One thought on “Why investors and advisors should embrace Robo-Advisors

  1. It is awesome to see this level of innovation come to the retail investor. Rick presents a balanced perspective and is correct to highlight the challenges investors face around their behaviour. Will robo advising be enough in tough markets to keep clients from capitulating?
    The other concern is around full transparency on costs. Remember, a fee for advice plus a fee for implementation means a return of the index minus those aggregate fees. While is it true that most mutual funds don’t beat their benchmarks due to closet indexing and high fees, all ETF’s don’t beat their benchmarks given their structure. Hence the need to be laser focused on costs.

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