If you look at robo-advisors and see a problem, just know it is a problem that is not going to go away.
It would be better to see robo-advisors as an opportunity, and then get busy figuring out what that opportunity is.
Technology-based financial advice services are cropping up with great frequency and are also being adopted by the firms that originally considered them to be assaults on their own bottom line. Most major financial providers now offer some form of robo-advisor service as a way to acquire new business with the intention of moving new investors into products and services that require human advisors.
Since the birth of robo-advisors, Spectrem has been studying the reaction of investors to the concept. The growth of usage has been slow but steady, and more importantly, the satisfaction with robo-advisors continues to match satisfaction with human advisors.
Spectrem’s most recent study of robo-advisors, Wealthy Investors and Their Perceptions of Robo-Advisors, asks investors to compare the performance of robo-advisors to human advisors in a number of functions often requested of financial advisors. “Adjusting to Life Changes”, “Establishing a Financial Plan”, “Retirement Planning” and “Meeting Risk Tolerance” were the subjects, and among investors who have used robo-advisors, approximately 30 percent in each case believed the automated advisor could do a better job than a human. Not equal, but better.
That’s a perception. No one has actually done a study of investors putting money into investments with both a robo-advisor and a human advisor and comparing results. But in a service industry like financial advice, perception matters a great deal.
Add the perception of robo-advisors being able to handle the tasks listed above with the added perception that robo-advisors have lower fees than human advisors and you have a recipe for expanded competition for clients.
The firms that have taken the “can’t beat ‘em, join ‘em” approach have the correct idea. These investors who are already attached to a firm through technology-based services are strong candidates to be moved into accounts with human advisors if the firms can prove the advantage of using the real person. These firms should not argue against or limit their own robo-advisors, because that will alienate the investors who already have robo accounts. Instead, they should show how the humans can add to the services provided by the robo services as a way to expand the investor’s portfolio.
The firms that are 100 percent technology-based are likely to come up against the concerns that their services are limited by the lack of interaction and conversation. There also still exists a large audience of investors who fear or distrust automation, although that audience may be dwindling.
The new Spectrem report shows that robo-advisors are often the first financial advisor for young investors. Whether they fear the pressure to invest that might come from a human conversation, or believe they have more control over their investments with an automated service, these new investors are getting comfortable with robo-advisors before they ever speak to a human.
When the electric light bulb was invented, the manufacturers of oil lamps were on the clock to extinction, whether they knew it or not. They had no recourse against the appeal of the light bulb.
Financial advisors and providers cannot fight the oncoming appeal of robo-advisors, but they can find a way to coexist. In fact, they probably must find a way to coexist.