Robo-adviser frenzy: Apocalypse or rerun?

What tax professionals' experience says about the future for financial advisers

Mar 16, 2015 @ 12:28 pm

By Roger Ochs

In the independent financial advice industry, as in many other sectors, the rise of new technologies often leads to fevered discussions that the “old models” of doing business are about to become obsolete. With the rapid proliferation of so-called robo-advisers, there has been no shortage of commentators suggesting that algorithm-driven, online applications are about to turn human advisory professionals into walking, talking 8-track tapes.

From my perspective, this scenario is not entirely new. Tax advisers experienced similar anxiety during the early days of do-it-yourself tax preparation applications. With that experience for reference, the oncoming disruption from the rise of robo-advisers may turn out to be not nearly as widespread or pronounced as the doomsday predictions would suggest.

(More: Robo rumpus gets vicious)

The robo-adviser trend signals a significant development in the way financial advice is delivered and consumed. In a relatively brief period, a bevy of robo-advisers and robo-adviser-assisted firms have appeared on the scene, attracted serious financial backing and steadily gained users. They have moved from providing basic downloadable tools to potentially becoming serious participants in the industry. Their technologies have grown increasingly capable and, as competition has ramped up, the various players are jockeying to find differentiating formulas that will help them better serve their clients and increase their market reach.


We have seen this movie before. During the 1980s, the tax preparation industry experienced comparable disruption when fundamentally competent self-directed programs enabled millions of Americans to complete their own returns without the assistance of professional tax advisers.

(More: 10 top robo-advisers to watch)

There was plenty of talk about how tax professionals would be replaced by DIYs, who now had access to the same software the pros had. Turbo Tax was flying off the shelf and earning a great deal of money for then-upstart Intuit. So-called experts predicted that tax professionals would become the next Tyrannosaurus rex.

We see today that the tax professional is, miraculously, alive and well. DIY preparation, which appealed to a certain segment of the market, has matured. Lately, it has even been losing market share to living, breathing professionals.


What drives the tax professional's staying power? Above all, the complexity of the tax code, which has only grown more convoluted and arcane, despite perennial calls for reform. Because of this complexity, more consumers — particularly those with complicated financial lives — turn to a trusted professional to complete their return. Even though these Americans have ready access to tax software and can access reputable professional tax research, they have increasingly opted to hire a knowledgeable professional to satisfy their filing requirements.

The dynamics are similar in the wealth management sector, but even more pronounced. Most people with complex financial lives are not going to forgo the counsel of a valued professional who can review and consider their situation holistically. There are simply too many variables to weigh against one another; it isn't just a matter of choosing various buckets for squirreling away money. These considerations involve not only investing but planning for business succession, tuition, retirement, and trusts and estates — as well as the taxes triggered at each step along the way.

A professional provides insight and guidance during times of change as well and act as an ongoing resource.

Fact is, the financial life of even average Americans is getting more complex.

For example, The Wall Street Journal recently reported that over 58% of retirement assets are now in defined-contribution plans — meaning that people have greater responsibility for their own retirement destiny.


With the stakes so high, many Americans will not attempt to go it alone, nor should they. The penalty for getting it wrong is not just a one-time tax overpayment or a dunning letter from the government, however unpleasant those prospects may be. Rather, success or the lack of it can mean the difference between 30 years of living poorly in retirement or 30 years of comfortable circumstances.

Further, the jury is still out on whether robo-advisers can indeed provide the same level of guidance human advisers can, even concerning simple investment decisions. I concede that robos will be able to give general allocation and model recommendations, but I haven't seen much beyond that.

Importantly, we haven't yet witnessed how well robo-advisers perform in a downturn. During soul-shaking market turmoil, will robo-advisers shepherd investors through the tough times without making mistakes that will haunt them for years? On the simplest level, robo-advisers can hardly perform hand-holding, which is often necessary for providing assurance and confidence through volatile and difficult periods.

It's also important to keep in mind that the difference between professionals and robo-advisers is not merely the difference between man and machine. Advisers have increasingly excellent tools at their disposal, including highly sophisticated monitoring, research, modeling, and trading and rebalancing platforms. The challenge of robo-advisers is not a contest between John Henry and the steam drill. Rather, it's the difference between an experienced, well-informed John Henry with the latest equipment and a stand-alone tool with no live driver.


Ultimately, the same Americans who choose to prepare their own tax returns will be the target market for robo-advisers. Robos will largely serve people who hold fewer assets and are likely to encounter fewer intricacies. While robos will fill a need for those do-it–yourselfers — just as Turbo Tax did in the 80s — those who choose to use a financial professional to provide custom advice will continue to do so.

Ironically, one of the great challenges for our industry is not that advisers will find themselves out of work but that we won't have enough of them. We have long heard about the graying of our adviser population and the need for more young people to climb the ladder. Rather than be the cause of diminishing the ranks, robo-advisers may help fill the need created by a lack of adviser talent.

In the long run, Americans will continue to recognize the value of a human guide who can help them plan for and cope with the rising complexity they see in all their financial matters. Financial advisers who can marry tax advice with professional financial advice will have a dual advantage in our increasingly challenging financial landscape — and will have no trouble co-existing peacefully with the robos.

Roger Ochs is president and chief executive of HD Vest Investment Services.


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