For every article about automated investment technology, there's an adviser who gets the urge to let everyone know exactly what he thinks about these newfangled robo-advisers (a term created by the brokerage industry to draw a derogatory connection between startups and the hated telemarketers known as robo-callers) and how his clients would never trust their money to a computer.
Digital advisers have been managing money for nearly a decade, but these negative takes on the technology still abound throughout the financial services industry.
Some of this is on the robos themselves. The companies were founded in the wake of the recession and sold themselves as smarter, more accessible and less morally bankrupt alternatives to traditional advisers. It's natural to get defensive, as is enjoying some schadenfreude when the new kids on the block slip up.
But a lot comes down to misconceptions about the technology. Here are a few.
Robos from established financial institutions are crushing the startups.
This is repeated so often that many in the industry accept it as gospel. People like to point out that platforms like Vanguard Personal Advisor Services and Schwab Intelligent Portfolios gathered significantly more assets than companies like Betterment and Wealthfront in a fraction of the time, concluding that startups have no chance at disrupting the industry.
The problem is, this narrative isn't accurate. Vanguard already had $17 billion on the PAS platform the day the platform became available to the public, primarily because the company moved $10 billion over from existing Vanguard Asset Management Services accounts. Likewise, some of the assets on Schwab's Intelligent Portfolios came from existing clients electing to move assets over to the robo, though the company has not disclosed how much.
The robo-adviser startups had to start from scratch, so conclusions based on AUM don't really say much.
Digital advice is just a fad.
That this argument still exists in 2019 is embarrassing, but here we are. Skepticism about new technology is healthy, but discounting innovation is often deadly to industry incumbents. In the last 20 years, we've seen titans of music, photography, home video, transportation, news media and retail all fall victim to digital disruptors.
Finance is not immune to the forces of change, and advisers who laugh off digital advice do so at their own peril. According to the most recent Form ADVs, Betterment now manages $14 billion and Wealthfront manages $11.5 billion, putting both companies on the list of the 20 largest RIAs by assets under management. Like it or not, these companies are now a powerful force in the industry.
Digital advice is a threat to financial advisers.
Just because the startups reached a large scale doesn't mean advisers have to fear them. Some high-net-worth investors do have portfolios with robo-advisers, but the vast majority of assets on digital platforms come from folks who would never be let past the front door at a traditional firm. Even with white-labeled robo technology, most advisers still aren't going to spend time going after clients looking to open an account with a few hundred dollars.
And that's okay! Everyone deserves help with investing, regardless of how wealthy they are. There's plenty of room for traditional advisers serving the wealthy to coexist with mobile apps investing people's spare change.
Robos provide asset allocation, not financial advice.
Some advisers on social media love to deride robo-advisers' portfolio construction as simplistic.
"Why would anyone pay for a collection of ETFs when they can just buy them directly from Vanguard? It's not advice, it's just asset allocation with automated rebalancing," they tweet.
The truth is that most people don't have any clue about what an ETF is, let alone how to build and rebalance a portfolio of large-cap, small-cap, emerging market and bond investments. Not because they aren't smart; there are lawyers, surgeons and literal rocket scientists who don't know much about investing beyond buying and selling name-brand stocks.
For most people, especially those who can't afford a traditional adviser, a robo-recommended portfolio is going to be a massive improvement over do-it-yourself investing. What may seem obvious to a professionally certified investor can be invaluable advice to someone else.
I could write a thousand more words on this subject — and here's a recent article on the myth that robo-advisers are just for young investors — but it all boils down to the same thing: Digital advice is a great tool for advisers, and it's potentially revolutionary for people who have long been ignored by financial institutions.
Robos are here to stay, and it's way past time for the industry to stop fearing or ignoring them and start accepting them as respected peers.