Mention the words ‘Robo-advice’ to financial planners today and you’ll get a range of reactions ranging from “It’s a waste of time – computers will never replace what I do” to “Bring it on! This gives me better ways to engage with my clients.”
Part of the reason for such a variance in responses is that there’s no common agreement around what a robo-adviser actually does. It seems like any online service that delivers anything resembling financial advice or a financial product is placed in the robo-advice basket.
So from Wikipedia’s perspective, a robo-adviser is concerned with portfolio management.
If you search Google, you’ll find this definition from Investopedia :
Again, it talks about portfolio management using computers.
And when I think about my experience with robo-advice, this is a recurring theme.
I’ve looked at Nutmeg.com in the UK, and whilst they offer some goal-setting tools, ultimately they’re about providing a low-cost online investing platform.
Wealthify is another UK provider that gives investors access to a low-cost range of investments with minimal human intervention.
In the US, Wealthfront.com offers investors a range of portfolios invested across index funds. And for a portfolio of $USD100,000 they charge around $USD20 per month.
All these providers offer online access and investors have access to a range of tools to check their performance and progress towards goals.
But there’s something these platforms don’t do well.
And that’s give strategic financial advice.
This is a criticism I hear from many advisers about these online services. If you just want to invest your retirement fund somewhere and you’re not particularly fussed about which provider manages your money, a robo-platform will work for you.
However, if you want to learn how much you need to be saving to have a comfortable retirement, and what options you have to save tax and build your nest egg, a robo provider will struggle.
One reason for this is that sometimes, the best option for the client isn’t necessarily the one that saves the most tax or results in the biggest lump sum.
And working through these options currently involves a conversation between an adviser and a client where the pros and cons of different scenarios can be discussed and assessed before a final decision is made.
Add to this the insurance and estate planning considerations and you have the need for a very complicated algorithm to be built and tested.
Currently, robo-advice platforms struggle with this.
But don’t be in a hurry to write them off because of this.
This is where self-driving cars come in.
All around the world, companies are testing out self-driving cars. They’re not perfect, but we’re a lot closer to having them on the road than we were ten years ago.
I predict that within the next ten years self-driving cars will become commonplace around the world. The algorithms will constantly be tweaked to improve the ride, but we’ll get to the point where a self-driving car will be safer to drive in than a manually driven car.
And so it will be with robo-advice.
Whilst today there’s no robo-advice provider that can handle the complexity of a comprehensive financial plan without any human intervention, the time is coming where this will no longer be the case.
If you believe in a future that contains self-driving cars, then you’d better believe in one where robo-advice covers the entire advice process.
This isn’t bad news for most advisers. They’ll use technology to make their businesses more efficient by automating much of the advice process. They’ll understand the areas they deliver the most value in and focus on these. Their clients will benefit by gaining the advantages of automated advice delivery coupled with the peace of mind that comes with the human touch.
Robo-advice – AKA technology. Just like self-driving cars, it’s not going to go away. Your choice is whether or not you choose to embrace it and use it to your advantage, or whether you ignore it.
Also published on Medium.