The reasons why human and robo-advisers will soon converge

Specific wants and needs make a human and robo-adviser "marriage" seem inevitable

Jul 14, 2014 @ 1:59 pm

By Steve Sanduski

Robo-advisers and real advisers each have what the other wants.

Robo-advisers, for all their bluster about empowering do-it-yourself investors with high-tech portfolio management wizardry, will ultimately morph to advice-giving firms with cool technology.

Real advisers, the flesh and blood professionals who meet eye-to-eye with clients to give investment and non-investment advice, covet the slick interfaces and operational efficiency afforded by the robo-advisers.

At some point in the future, like husband and wife, the two shall become one.

Over time, robos will add advice and real advisers will add an online option. In fact, it's already happening.

Robo-adviser Betterment has partnered with superstar RIA Steve Lockshin to launch Betterment Institutional, which, according to Lockshin, “reinvents the consumer experience and exponentially increases advisory efficiency.”

Real advisers, such as the ubiquitous Ric Edleman and the fine folks at Savant Capital, are leading the charge from bricks and mortar advising to the world of high-tech online investing. Each firm has created its own version of “robo-advising” albeit with decidedly un-robo like traditional RIA pricing.

(More: Meet the humans behind algorithmic investing)

Technology, Demography and Wealth

Three factors inexorably point toward the convergence of robo and human advice.

1. Technology: The robos have done an incredible job of creating a pleasing online user experience that makes monitoring your portfolio from the comfort of your palm a snap. Real advisers will ultimately be forced to deliver this high-quality online experience, too, as the next generation of investors come to expect it.

2. Demography: As Boomers die, their traditional face-to-face way of doing business will give way to Gen X and Millennials, who are comfortable communicating through 5-inch screens. Real advisers will have to adapt to a “business anywhere, anytime, through any means” mentality or face being marginalized.

3. Wealth: Young adults with little money will grow into successful professionals with 7-figure portfolios. When that happens, the risk of a wrong move multiplies exponentially and (most) casual investors will turn to seasoned pros for real advice. Robos understand this and will be forced to add a human advice component to keep assets from fleeing. Oh, and don't forget, when the next 30 percent market drop occurs, investors will panic and seek the comfort of a live pro.

As popular as the robos are with venture capitalists, I doubt any of them will be standalone firms five years from now. Most likely, robos will get snapped up by larger, traditional firms who see them as a strategic link to:

1. Quickly upgrade technology,

2. Add an insurance policy to appeal to the next generation of investors,

3. Meld cutting-edge user experience with real-person advice.

Of course, there is a wildcard. Robos could be acquired by another technology company such as Yahoo! or Google. Yahoo! already has a strategic partnership with SigFig so it's no stretch to think Marissa Mayer has bigger plans in store for the finance part of her portal.

The Robo Threat and Opportunity

It's foolish to dismiss robo-advisers as a passing fad akin to the day-traders of the late 1990s. Robos offer a legitimate and valuable service, which will ultimately have three profound impacts in the industry.

First, they will put severe pressure on investment management fees. For 25 basis points or less, these firms deliver well-researched investment services void of emotional mistakes. Robos are setting a new standard that says quality investment management (at least the passive kind) is a commodity and available at a commodity price.

Second, robos highlight the fact that investors typically overpay for investment management and underpay for quality advice. The traditional 1 percent fee for an RIA to manage money is far out of line with what a robo charges. Eventually, clients will see the difference and demand greater investment management value.

Third, robos will force real advisers to step up their game or risk extinction. Visionary advisers understand the real value they deliver is in non-investment advice. The traditional 1 percent fee really breaks down like this—25 basis points for investment management and 75 basis points for advice. The problem here, though, is two-fold. Consumers are accustomed to paying for money management services while advice is “thrown in” as needed. And advisers have no value proposition to justify charging 75 basis points for advice.

The opportunity for visionary advisers lies in creating a true “real person” advice offering with demonstrable benefits coupled with the ease and simplicity of a robo.

Simply charging 1 percent for managing money with ad-hoc advice thrown in is not a long-term sustainable business model. The robos and the visionary real advisors will eat you alive.

What to Do

Robo-advisers are technology firms that happen to offer investment management services. Real advisers are person-to-person financial advice givers who happen to use technology. Those of you who want to excel going forward will be both.

Do these two things:

1. Upgrade your technology so you can offer an online user experience that makes Gen-X and Millennial investors feel at home. And by all means, explore partnering with robos rather than reinvent the wheel.

2. Develop an advice offering that is unquestionably worth 75 basis points a year. While many advisers claim to offer advice, few have a systematic process in place that clients would happily pay 75 basis points a year to experience.

Deep down, you know that the value of advice, the impact of advice, is much greater to your clients than trying to eke out an extra 50 basis points of investment return.

So, match what robos can do on the investment side, then put your effort into delivering real advice that clearly, straightforwardly, and unquestionably moves your clients toward a state of financial independence, meaning, and happiness.

Steve Sanduski is a New York Times bestselling author and president of Belay Adviser. His firm designs, builds and delivers comprehensive solutions for financial companies that want to make a profound impact in people's lives. Follow him on Twitter @SteveSanduski.


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