How to meet robo-advisers head on

Robo-technology is here to stay. Adjust your strategy to ensure that you are too.

Jun 23, 2015 @ 4:55 pm

By Frank Muller

Let's face it: robo-adviser technology is here to stay. As full-service financial advisers, we will have to ramp up our communication strategies and combine them with first-class services and distinctive products to ensure that we will not only survive, but also thrive, as automated platforms amass a greater market share in the coming years. And in no uncertain terms, it means beating the robots at their own game.

So how do we accomplish that?

Overcoming Behavioral Economics

According to Daniel Kahneman, who won the Nobel Prize in 2002 for his work in behavioral economics, the fear of losing is more motivating than the pleasure of gaining, especially when it comes to investment decisions.

So how does an advisory algorithm respond when market volatility rocks an investor's portfolio? The standard robo-adviser algorithm has been back tested through stressful periods of inevitable market volatility, such as the period from 2008–2009, and it's important that investors understand the level of volatility robo-advisers are selling as a result. Drawdowns in standard 60/40 stock-bond portfolios, even with rebalancing, could total 20% or more.

History shows that investors do the wrong thing when this type of volatility occurs: they hit the exits. It's key that we position ourselves — and our services — as the first call a panicked investor gets before they decide to lock in losses by selling on their own.

Offer everything the robot does, and then some

One perceived benefit to robo-adviser platforms is that they provide a 360-degree view of a client's finances. It's critical that human advisers provide the same aggregation an investor would get online. Take into account an investor's finances, expenses, bills and do basic financial planning calculations.


Are you seeing the client's entire financial picture, and not just the money that is with your firm? What about other accounts with banks, previous employers and other financial managers? Flesh out your client's entire financial picture and lifestyle so you can ask the questions that will uncover the assets, as well as your client's short-term and long-term goals for these funds. Or, partner with a professional financial planner and other expert providers to supplement your practice.

Specialized investments: Your tool to help manage risk and add diversification

In general, robo-adviser portfolios are comprised of mutual funds and money market funds and in some cases, entirely of ETFs. What these investments have in common is their low cost, high liquidity and wide availability that makes them easy to track with standard benchmarks. Point out to your clients that a well-allocated portfolio that addresses a range of risks and market conditions can offer a level of protection in volatile markets.

Reach into the depth of offerings on your platform and find out how to supplement your client's portfolio with non-correlated investments that move in a low- or non-correlated direction during times of market volatility — which can also dampen the likelihood of impulsive investor decisions. Both robo- and human advisers agree that wealth can be sustained and preserved if the client stays committed and invested. Where we disagree is that robo-advisers believe that an algorithm and a spreadsheet can overcome the human instincts of fear and greed.


As financial professionals, we must challenge people in their thinking that low cost and expedient is just as good as wise counsel and interpersonal relationships. Businesses choose to compete on either value or price, and it is our job to help investors understand that these businesses choose to compete on price — not value.

The role of an adviser is about portfolio positioning and understanding the irrational decisions and biases of clients and linking those two concepts together. An adviser can ward off destructive client investment behavior and, in fact, construct a portfolio that is able to weather many different market risks. A robo-adviser, on the other hand, can't do a client gut-check, nor can an algorithm-based program fully understand the risk aversion/biases held by an investor that will cause him or her to make the wrong choice at the wrong time.

By arming yourself with the tools that these automated platforms offer, along with the intangibles that they can't — the ability to offer nuanced advice, to pick up the phone to help them overcome self-defeating behavior and to forge multi-generational relationships — you have the upper hand on a low-cost, limited-value machine that's here to stay.

Frank Muller is executive vice president and head of distribution at Behringer.


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