Practical analysis for investment professionals
03 November 2014

Robo-Advisers: Opportunity or Threat? (Online Forum)

Many believe that investment management is a discipline that requires a large amount of personal attention and professional advice. However, an increasing number of investors — especially millennials — have started looking to technology to help manage their money. The rise of a new breed of wealth manager — commonly referred to as a “robo-adviser” — is changing the landscape of the advisory business and prompting many investors to question the way they obtain investment advice and what they are willing to pay for such services.

This is an important game changer and it raises an important question: Does the rise of low-cost, algorithmic investment services point to a natural change in the industry that makes way for high-volume, low-cost providers? Or is it a trend that will pit these firms against traditional high-end providers of advisory services?

In a 2013 interview, Andy Rachleff, CEO of Wealthfront, was asked to sum up the big idea of his business in 10 words or fewer. He replied: “Everyone deserves access to sophisticated investment management.” So what constitutes sophisticated investment management? Cullen Roche of Orcam Financial Group says robo-advisers “don’t do much (if anything) that an automated buy and hold portfolio doesn’t already do (a well-informed Vanguard client, for instance, gets just about everything these firms offer without the extra fees).”

It is still unclear if these platforms compete on price against more customized strategies and investment products, since as of now they have limited their products to index funds and exchange-traded funds. Does the robo-advisor platform have to evolve throughout the client lifecycle as portfolios increase in size and there is a wish to invest in other asset classes and products in order to maintain clients over the long run?

Others that question a fundamental change in the advisory business and competition with traditional advice point to the value that flesh and blood advisors can provide that an algorithm may not. Some criticize how client information is collected by these automated platforms and believe that people have an advantage in determining a client’s financial goals, investment constraints, and risk tolerances.

Ben Carlson, who blogs at A Wealth of Common Sense, makes the point that low-cost investing is a potential boon for investors but cautions that their behavior plays a large role in their ultimate investment success. He argues that “lower costs do not prevent overconfidence, short-term emotional gut reactions, over excitement, a herd mentality, loss aversion, or any of the other behavioral biases which can hurt investor performance in the long run.” How will these platforms fulfill their clients’ needs during the next downturn, when they require some hand-holding to stay rational and committed to their investment plan?

Investors are faced with myriad opportunities for investment advice, each with differing services and costs. Firms like Betterment, Wealthfront, and FutureAdvisor have been so successful at raising capital from venture capitalists that many other advisory firms, including Vanguard, have begun providing some type of automated services in order to profitably service smaller or less sophisticated investors at lower cost than their traditional offerings. Discount brokerage behemoth Charles Schwab announced it would enter the market early next year and offer advisory services for free, which begs the question: What is the correct way to price advisory services and how can they be structured to be more understandable, transparent, and comparable? Can these platforms compete against those that are willing to provide comparable services for free?

To answer some of these questions and provide insight about current changes in the investment advisory industry, the Future of Finance initiative at CFA Institute has assembled a panel of experts to discuss the implications and potential effects of robo-advisers on the marketplace.

Our distinguished panelists include Randy Cass; Leigh Drogen; Daniel Egan; Gregg Fisher, CFA; and Tadas Viskanta.

Cass is the host of Market Sense on BNN, a Canadian business news network, as well as the founder of two asset management companies: Orchard Asset Management and Nest Wealth. He is a board member of the Toronto CFA Society.

Drogen is CEO and founder of Estimize, a crowdsourced earnings estimates platform. He is a frequent commenter on the role of technology in evolving global finance.

Daniel Egan is the director of behavioral finance and investing at Betterment, an online financial adviser and investment manager.

Fisher is founder and CIO of Gerstein Fisher, a registered investment adviser (RIA) in New York City that employs a quantitative, technology-intensive investment process.

Viskanta is founder and editor of the investment blog Abnormal Returns, and author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.

The discussion will run 18 November 2014. If you’d like to share your perspective or pose a question for our panelists, scroll to the bottom of this post and leave us a comment. Or send a tweet to: @RobertStammers or @laurenfosternyc. We’ll do our best to incorporate your thoughts into the discussion.

Keep your browser open to this post on 18 November 2014 as the discussion will unfold live in the window above.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Robert Stammers, CFA

Robert Stammers, CFA, was director of Investor Engagement for CFA Institute and was responsible for increasing the use and distribution of Future of Finance and CFA Institute content by various audiences. Prior to joining CFA Institute, Stammers was the principal for his founded company where he consulted for real estate owners, lenders, and syndicators to develop and analyze structured real estate investments. There he devised strategy for obtaining debt and preferred equity capital and created finance-related marketing materials and research papers for various clients. Stammers has authored over 100 articles on various financial and investment topics for such investment periodicals as Forbes and Investopedia. He served as a senior equity analyst, where he was responsible for the creation of new investment tools and instructional products to provide the revenues for two new investment education companies. As a senior executive for several institutional fund managers, Stammers was the portfolio manager for a $1 billion enhanced real estate fund, a $1.2 billion private timber fund, and several pension fund separate accounts.

10 thoughts on “Robo-Advisers: Opportunity or Threat? (Online Forum)”

  1. Pratik says:

    I am Pratik from India. I was thinking about robo-advisers for quite some time. I understand that US and other western market do have quality human advisers who can probably cater to their investment needs. But in India, supply of quality advisers are very low and India is going to become youngest economy of the world, the demand for such advisers will be there but existing business model doesnt seem to cater to such young investor needs. In this condition, I feel something is better than nothing, so here robo advisers can play a big role but I would love to know your opinion on the matter, how does robo advisers fit into asian economies like India considering there are certain hurdles like resistance to pay advisory fees, preference to invest directly over funds etc.

    Would love to know your opinion on the matter.


    1. Janos says:

      Hi Pratik,
      My name is Janos, I currently work for a fintech startup ( and I’m doing some research on robo-advisors. I see that you commented on this topic a while ago – have you ended up investing with robo-advisors? If yes, I’d love to hear about your experience – we could have a Skype call sometime, if you like.
      Drop me a line if you’re interested to have a chat ([email protected]).

  2. Robert Stammers, CFA says:

    Hi Pratik and thank you for your comment.

    You pose a very interesting question about how these tech based investment management platforms will have to evolve, or adapt, to meet the needs, traditions, and expectations of their new clients in each local area. Any language gaps will also need to be addressed.

    My assumption is that when moving into a new area or when servicing new clients, these firms will have to undertake a great deal of study of local history, customs and traditions, as well as their clients’ money management habits and skills. This will need to be done in order to understand how advisory and investment services will need to be adapted to conform to their clients’ needs.

    A good part of our online forum: “Robo-Advisors: Opportunity or Threat?” (which can be seen right here starting the morning of Tuesday November 18th) should address how these new technologically advanced platforms will need to evolve over time and what these changes will mean for the rest of the investment management industry. Please join us here on the 18th and if the conversation turns to advancement and changes in advisory services or the expansion of robo-advisor firms outside of North America, I will present your question to the panel.

    Thank you again for your interest. Hope to see more from you on the 18th.


  3. rao says:

    please add me to your conversation of 18th November

  4. Martin Raab says:

    Robert, I appreciate that you and the CFA Institute brought up this specific question. Based on my own (and my clients) experience the Robo-Advisors are a nice tool for persons who feel very self-confident about its investment strategies–or just do not care about the broadness of today’s investment world.

    Also, Robos are good to make all of us aware that classic advisors have to deliver outperformance and fees are not a God given freebie.

    But a Robo-Advisor will probably never ever deliver the personal touch, tailored investment advice sophisticated investors desire–and virtually everyone deserves. Try to call a Robo-Advisor and ask about its thoughts about the Renminbi or US dividend strategies. Or how about an IRA roll-over.

    Finally, a human advisor has to be a well-educated, up-to-date, digitally-savvy investment partner which delivers outperformance or just match a certain risk level at lowest costs.

  5. Ron Rimkus says:

    Doesn’t the issue come down to who is programming the robo-advisor? The markets are ever-shifting with prices being set by marginal supply and marginal demand. Who is buying and selling is just as important as what is being bought and sold. As prices are bid up or down, the rules of the game change. As central banks alter monetary policy, the rules of the game change. As new companies or new management or new products or new industries emerge and compete with old line companies the rules of the game change. And on and on. Change is the one thing that is constant in investing. So, who is programming the robo-advisor? And is that person better than your advisor? It seems to me to be an important and often overlooked question.

  6. Bill says:

    My question is what is the relative difference between robo advisors and pre allocated etf models that already exist such as I-shares various risk models ranging from conservative to aggressive. These are prebuilt models available under one symbol? I would guess that the performance of these pre-built etf models are just as good as a robo advisor. So why use a robo advisor? Why not simply buy the etf model? Is the difference simply marketing?

  7. jonathan says:

    It is useful to step back and recall the whole investment philosophy behind the robo advisors, propagated by Vanguard’s John Bogle and Burton Malkiel, that says that active management has not been proven to be superior to buy and hold index fund investing. If you are in this camp, then it boils down to coming up with a sensible asset allocation profile based on your age and liquidity requirements, and implementing it in the most cost effective way, generally via Vanguard ETF’s. No real need to pay recurring fees to a financial or even a robo advisor for this approach.

    Some however, prefer a more active approach to investing and believe that it is possible to outperform the market, or even just enjoy the thrill of finding good investing ideas, but as Tadas points out the fees relative to the incremental returns are generally high. I think the future will see more robo type, active hedge fund solutions, offered in a more efficient mainstream way, with fees perhaps slightly higher than the robo advisors to compensate for the active research effort. This will be more exciting.

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