A few weeks ago I went to Schwab Impact in Denver, which is a conference for investment professionals and money managers. I was fortunate to listen and learn from some of my favorite people in finance like former Fed Chair Ben Bernanke and legendary investor Mario Gabelli. I couldn’t help but notice, though, that the topic that everyone wanted to talk about at the conference was “robo-advisors.”
Robo Advisory firms are a relatively new concept, emerging only a few years ago in the investment industry. A robo-advisory firm attempts to replace a traditional person-to-person interaction with algorithms and digital technology. Instead of sitting down with a financial planner at their office, a robo-advisor facilitates your investment planning primarily through your desktop or mobile device.
The way these programs typically work is that they have you open an account based on a questionnaire, and then based on your answers the algorithm tells you what assets you should be invested in. Typically these are five to ten EFT’s, and you can either take that initial advice and invest in those ETFs yourself, or you can “hire” them to use their automated system to trade, invest and re-balance your portfolio.
These often have a low-cost at somewhere between 0.25% up to 1% of your total invested capital for the year. The difference in cost typically depends on how much human interaction you receive from the company. The lower the cost, the more likely it is that you’ll only be working through your iPad.
I’m a huge believer in technology. It’s made my job easier and more efficient, so why shouldn’t it be passed on to investors? I think there’s a natural progression taking place right now in the financial industry towards offering more technology-forward options, just as there is with almost all other industries. Just think about Uber (remember my post about the Uber Economy)? Who would have guessed five years ago that technology could make finding a ride so easy?
While we’re moving towards more use of technology in the financial industry, though, I don’t think it’s time to completely discount the traditional method of meeting with a real live financial planner.
Imagine removing a “live person” in the following situation: Let’s say there is a wonderfully intelligent video program that acts as and replaces a teacher in a classroom. Effectively removing a “real live” teacher, and replacing them with technology. We now have videos based on the fundamentals of education to teach your child from kindergarten to college graduation.
While in theory this could work, it most likely would not work for everyone. If circumstances were perfect — every student full with a good night’s sleep and eager to learn — then everyone in that classroom could potentially do well.
However, we all know that’s not how life works. What happens when two children get into a fight, or one falls asleep because they stayed up too late? What about the child who has parents fighting at home and can’t focus? These are issues that can’t be addressed and corrected for by a digital video screen that teaches reading and math.
While this might sound unrelated to the investment industry, it’s actually very similar. A financial advisor or planner is there to teach, guide, and coach their clients though the most straightforward and complex times of life.
When the market starts acting up, it’s easy to get distracted, get off track, and make bad investment decisions. For most people, money (especially our life savings) is very much tied to our emotions. So when we become concerned about the world, the stock market, or a particular life event that impacts our financial situation, I believe that humans will need more than just an algorithm to turn to.
That being said, the robo-advisory industry isn’t going away. Going back to my teacher analogy, I’d say that we’ll be learning from interactive videos on a big screen, but we’ll still need a teacher in the classroom.
My company actually launched a program named Wela more than five years ago. In the past two years our team has been building Wela to compete with the newly emerging players from Silicon Valley. We’re not working to raise hundreds of millions of venture capital dollars to promote it, but instead we’re just trying to raise awareness in our local Atlanta market.
I think that everyone should have access to financial advice and information without having to pay high premiums. While Wela is a “digital advisor”, we still believe in a personalized experience. So Wela is trying to bridge the gap between having a personal tutor and being left in a classroom alone with a screen.
I’m sure in the next few years we’ll continue to hear more and more about robo-advisors. I’m glad there’s an entirely new industry based upon this new technology. I think it’s important to remember right now, though, that these newly emerging programs account for just $5 billion out of a multi-trillion dollar investment industry in the US. So right now the robo industry is the size of an ant relative to the elephant that is Wall St. and financial advice business, but this digital ant definitely has some bite.
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