My main career for the past 10 years or so is back office support for a financial planning firm. Couple those 40 to 50 hours a week with running a personal finance blog for 8 years or so and I like to think I am usually aware of movements within the industry broadly referred to as financial planning. Within those dual roles it has been pretty amazing to watch the hockey-stick growth and popularity of Robo-advisors. Personally, I think it is fantastic how much they, as a whole, have changed the industry for the better in a shockingly short period of time.
Notwithstanding, I think there is a massive hole with most Robo advisors that no one wants to talk about mainly because they haven’t had to in the unprecedented bull run of the past 10 years or so.
What is a Robo Advisor?
This is not meant to be a post filled with affiliate links describing the different companies in the space. I just don’t have enough experience with each (any) platform. Rather, I hope to just provide a simple problem using any robo-advisor which isn’t also connected to a human. So let’s take a 30,000 feet view of the topic which starts with a definition from Investopedia ,
Robo-advisors (robo-advisers) are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets.
There seems to be a spectrum with regard to the term. There are some robo-advisors that are completely hands off and you are getting a pure software driven product all the way to the other end of the spectrum where the “robo-advisor” is simply a cool piece of software that is used by a human advisor…and obviously everything in the middle.
What I mainly like is how the term/sub-industry has forced an otherwise slow moving industry to lower fees and provide website and software changes. Working for an Fortune 100 financial firm there has been more than one memo circulated about trying to create our system (with no roll out to date). I agree with Joshua Brown of the Reformed Broker when he says,
The entire wealth management industry is going to converge with the robo-advisory space in terms of both the degree of automation and the price. The whole thing will look a lot like what Bill Harris built five years ago at Personal Capital – lower cost investment advisory with a web-first interface and flesh-and-blood advisors behind it. This is what Fidelity and Vanguard are building, it’s what Schwab is building and it’s what Betterment, the most successful standalone, has become.
How Are they Going to Fail Their Customers and Clients?
I think the rise of the robo-advisor is similar to the rise of DIY legal services although the DIY legal services industry had a 5-10 year head start. My main problem with DIY legal service sites is that it doesn’t provide a customer or client with an understanding of what they don’t know, they don’t know.
Most people do not know, that they don’t know that cyclical nature of the stock market often with vicious, stomach turning, highs and lows (from JP Morgan Market Insights Q3 2017):
What I am worried about, is a the average customer of a true robo-advisor who sees a correction like in 2008 or even a multi-year bear market like in the early 2000s and runs for the hills. There is no human advisor to teach them about what most don’t know – markets are cyclical in nature and that corrections happen.
I could be wrong, but I don’t think I am (why else would I write this post)! When, not if, a correction occurs I think that a disproportionate amount of people using a true robo-advisor, with little to no human interaction, will exit the market when they shouldn’t be as compared to those with a human fail safe that can be there to remind them that the world will keep on spinning.