"Hello Robo, I'm nervous about my investments, I'm not sure they are OK. What should I do? No, I don't want another email telling me everything is fine with my strategy. I really need to know if there's some changes I should be considering, and while we are emailing back and forth, my wife and I have been thinking about whether we can afford a bigger home? I'd love a new car, too. Could I please speak to a person? Hello? Hello?”
The third quarter saw another round of more than $100 million invested into robo-advisers by savvy investors hoping to change the world of wealth management. The core premise of every digital solution is that individuals can get educated, act rationally and do the right thing all by themselves. Of course there's nothing like a bull market, especially one that hasn't suffered a major setback for more than five years, to convince everyone that individuals don't need any help. But those of us who work with clients know the truth: We all need help doing the right thing, especially when things are overly complex or the markets get scary.
None of the existing robo-advisers, as currently designed, will be a serious threat to the core business of successful advisers who work with the right clients today. Why? Because regardless of the industry, people need human help when there is complexity, or when the cost of being wrong is too high. Let me use a matrix we developed for decision-making to assess digital competition to illustrate:
The chart above shows decision-making along two criteria: complexity and cost of a mistake. Most digital solutions thrive in the lower left hand (southwest) quadrant, when there is little complexity and when the cost of being wrong is low. Robo solutions work great for buying branded products and commodity items at the best price. They work well for finding an alternative to a cab or finding a nice restaurant. However, when either of these two conditions changes, either because decisions are more complex or there is a lot to lose if you make a mistake, human interaction becomes more important. Here are some real world examples:
(Related read: Running an advisory practice in the age of the robo-adviser)
• The travel industry. There is talk about the financial adviser becoming extinct like the travel agent of the 90s, but think about why Expedia and Travelocity could so easily wipe out travel agents. Booking a hotel room is easy to do and the cost of being wrong is low (southwest quadrant). That means basic travel needs can be handled without human intervention, making them easily replaced by digital solutions. The human-based agencies that have thrived are tech heavy platforms (think American Express travel) and those that create personalized trips or deal with corporate clients where complexity is higher and knowledge more valuable.
• The real estate business. Web solutions like Trulia, Redfin and Zillow are very good at giving us an estimate of what our home is worth and creating a listing of interesting homes we might want to look at. Still, most of us use these sites for information and education rather than to complete any transaction. The reality is that good real estate agents will always have a place in the business. Why? Because homes are a big purchase, and everyone wants to get the right home and have it negotiated at the right price (northeast quadrant). However, every realtor is now dealing with a smarter consumer who expects a digitized experience, too.
• The legal and accounting professions. We might be quite comfortable going to LegalZoom for incorporation documents for a new business. After all, it's cheap, convenient and simple. But what happens when our company is more successful; do we still avoid lawyers to save money? Of course not. The stakes are too high and the complexity too much for us to trust a digital solution alone. Same is true for accounting; we are happy to use an online digital tax prep tool when our tax return is easy, but as wealth builds and complexity increases, so too does the need for a seasoned professional. In both cases we are shifting from the southwest quadrant up.
THE HUMAN FACTOR
You will notice that all of these digital competitors have changed the landscape in their respective industry and the roles of the people who work in them. The businesses that have thrived embraced technology and created a human-led hybrid (or what we call a bionic) solution. Why? Because humans have two skills no machine has and that our clients really need when things are complex or the stakes are high:
1. We have judgment. If you are an adviser of any kind, the biggest reason your clients are with you is because they trust your judgment. The ability to understand what is happening, point out how their feelings are clouding their decision-making, provide perspective and give them choices that are right for them in the current situation is what makes you special to your clients.
2. We have empathy. People will usually come to the right conclusion if they have someone guiding them who understands them. Our ability to listen, understand and help provide answers empathetically cannot be coded into a machine.
A hypothetical client in Michigan happened to retire at the worst possible time, September 2007. He had planned carefully, amassing $1.7 million. He and his wife expected to live on $65,000 per year with annual inflation adjustments. They had a nicely diversified 50/50 portfolio and all the planning work had been done by a capable adviser to assure they would be fine. Of course the black swan arrived right after his retirement and the S&P 500 proceeded to fall 50%.
A year later they couldn't stand any more declines in their portfolio and wanted to move all of their savings (now around $1.4 million) to cash. The adviser listened, showed the retired couple the consequences of moving all their money to cash (radically reducing spending for the remainder of their lives) and then discussed an alternative. If they simply cut their spending by 8% annually and kept their money invested, thereby not realizing a 50% decline, everything should be fine. The couple left a little nervous but patient. The markets recovered and a year later they were back in fine shape. I share this story because it happens every day in some variation all over America. There is a real person, with a genuine concern, and somebody with judgment and empathy is helping them to make the right choices. Machines cannot yet provide the judgment and empathy we all need in challenging situations.
IMPENDING CHANGE IN ROBO-ADVISERS
This is why I believe that many robo-advisers will fail or have one of three choices in order to survive as viable businesses:
• Option A. Stay direct to consumer and provide a low cost solution for people when their lives are simple and the risk of being wrong is low, but lose them as either of those things change. They will need massive scale to be profitable with their current pricing and will likely face client turnover in market turmoil.
• Option B. Morph into a bionic adviser with real people helping clients (and a different pricing model), but driven by technology as an interface. They will compete head on with other large national advisers and the huge consumer firms (custodians and fund companies) that in effect run their own version of tech supported (bionic) advisers.
• Option C. Decide they can't build a people-powered, direct-to-consumer model without compromising their “platform” and shift their strategy to B-to-B, providing their technology for human advisers.
Make no mistake, these robos will force a change in the landscape, especially when it comes to pricing and democratization of knowledge, but they won't necessarily be the winners of the new era. Those who create a platform that can delicately balance the use of people and technology, merging the two in what we call the “bionic adviser,” will be the big winner.
How we incorporate technology into our businesses so we can focus primarily on the deeply caring and knowledgeable interactions only we humans can provide will be the question all of us will need to think about. It's what we all do for a living, and no machine can replace that. But machines can certainly free us to do what we do well more often, and in the end do it all a lot better, and more profitably.
Joe Duran is chief executive of United Capital and author of “The Money Code: Improve Your Entire Financial Life Right Now.” Follow him @DuranMoney.