Debunking 3 big myths about robo-advisers

Cutting through major misconceptions about robo-advisers, from the name's meaning to their role in financial service

“Robo-adviser.” The phrase prompts mixed reactions, and its emotional overtones vary wildly in the minds of readers.
A traditional adviser, spitting the word out with derision, can make “robo” sound like the “near” in “near beer.” On the other hand, a breathless tech reporter can make it sound full of mysterious power and impending disruption.
Even among the robo-advisers themselves, its interpretations are mixed. Wealthfront, for example, has opted for the more precise and neutral phrase, “automated investment service.” Betterment calls itself an online financial adviser. Both terms are fair, but both are also a mouthful. If Strunk & White teach us anything, it’s to never use three words where one will do. More words don’t always lead to more clarity.
At FutureAdvisor, we think “robo-adviser” works just fine, but the debates raging around the sector in the last few years make it necessary to address a few myths about the term.

Myth #1: “Robo-adviser” is only used to disparage online startups seeking to replace more established, warm-blooded rivals.

The words “lawyer” and “banker” are also disparaging, depending on who you ask. We have to accept that we will mean different things to different people, and the group we prioritize is our clientele, who don’t know or care about the politics of the term. It’s inside baseball.

While amateur etymology has its pitfalls, the earliest instances I’ve found of robo-adviser’s current use date from blog posts written by Bill Winterberg and Michael Kitces. (The phrase also made this precocious appearance in 2002, only to disappear again for almost a decade…)

Each time, the advisers sought to describe without hype or fear-mongering a business model that relies on software alone for portfolio management. In their posts, “robo” means automated, low-touch financial advice that doesn’t require a strong relational component. That’s only negative if you think high-touch advice is necessary. Our clients tend to think it’s inconvenient.

The notion that “robo-adviser” is insulting has driven some companies to redefine themselves and the sector. Here’s one taxonomy that’s been proposed:

1) Automated investment services: Betterment, FutureAdvisor, Wealthfront
2) Technology-assisted advisers (new cloud-based entrants using technology for customer relationship management and lead generation; reliant on human advisers): Personal Capital and others
3) Traditional advisers (retail locations staffed with human advisers): Almost everyone else.

For RIAs who want to talk shop, those categories are a good glimpse at the ways in which technology is diversifying how advisers do business. But there are many hybrids mixing the methods of one class with the resources of another, so even the above list is an oversimplification. We find robo-adviser to be the most useful, and striking, oversimplification of all.

Myth #2: Robo-advisers will replace human advisers.

Untrue. There’s a strange “glass-half-empty” thinking in the industry that assumes robo-advisers are going after the same clients served by traditional advisers, and providing them with the same benefits. This is to misconstrue both the nature of technology and the scope of the market.

We didn’t build technology for the high-net worth individuals whom traditional advisers have served exclusively for so long, though many have found value in it. Nor did we build it to be customized for every unique client situation. Some aren’t a match.

(Related Read: 6 lessons human advisers can learn from robos)

We built it to address the core portfolio management needs of tens of millions of mass-affluent and retail investors, who by most estimates collectively own as much as, if not more than, the investable assets of the total high-net worth market. Robo-advisers aren’t just competing for market share, we’re creating it. You can thank us later.

Our software engineers have captured a few of the historical tasks of the adviser — namely portfolio rebalancing and tax-loss harvesting — and productized it. Productization is something Silicon Valley does very well, because products scale in ways that consulting services like traditional financial advice don’t. And scale is key when it comes to tapping a market of many smaller investors.

Our engineers transmuted a few ineffable skills of the traditional adviser into a Web interface that users can see and touch. This new thing, because it’s so simple and so easily replicated, serves market segments that until now were only met with rejection at the hands of the industry. This is an unquestionably good thing. Like the Mars Rover, robo-advisers have gone where human teams couldn’t find the oxygen to breathe. Which is what machines are for.

Myth #3: “Robo-adviser” is a silly misnomer, and doesn’t actually mean anything.

Let’s break it down. Robo- comes from “robot,” a word first used publicly in 1920 by the Czech playwright Karel Čapek to mean “forced laborers.” Robot, noun: a mechanical device, emotionless yet efficient, that resembles a human in its form and in the work it produces.

It so happens that we pride ourselves on the fact that our algorithms help remove the emotion from investing, and rebalance portfolios with speed and precision. Automated? Hard-working? Efficient? Check, check and Czech.

But do robo-advisers actually “advise” anyone? Well, yes, actually. FutureAdvisor’s free service, which has more than 150,000 users and tracks about $13 billion in assets, tells our clients exactly what they should buy and sell in order to minimize their fees, help diversify their risks and help optimize their taxes.

Sure, we’re not dealing with estate planning or practicing bear-market therapy, but if telling someone what their ideal portfolio ought to look like doesn’t count as advice, I don’t know what does.

Megan Graf is a client service specialist with FutureAdvisor. If you have questions about life and work at a robo-adviser, feel free to e-mail her.

The views expressed represent the opinion of the author and are not intended to reflect those of FutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities.