Practical analysis for investment professionals
21 November 2014

Financial Advisers Need to Get “On the Right Side” of the Robo-Adviser Trend

Why can’t we (why can’t we)
Why can’t we get along
When we know we can’t be away from each other for long?
Why can’t we (why can’t we)
Why can’t we get along
When at the end of the day we know we gotta come home?
— “Why Can’t We Get Along?” 112

As part of its Future of Finance initiative, CFA Institute recently hosted an online forum, “Robo-Advisers: Opportunity or Threat?” to learn more about how these digital platforms will change the advisory business. We were fortunate to have an esteemed group of participants, including Randy Cass, CFA; Daniel Egan; Gregg Fisher, CFA; and Tadas Viskanta.

A day later, as I read through the transcript, one refrain kept coming to mind: “Why can’t we get along?” It seemed to me that the debate shouldn’t be framed as robos vs. humans, but robos and humans. Both have strengths and weaknesses and given the nature of human beings, there will always be a role for a traditional adviser — one who has adapted with the times.

This is how Daniel Egan, director of behavioral finance and investing at Betterment, an online financial adviser and investment manager, put it:

“I’m not naive about the relative strengths and weaknesses of digital advisers vs human advisers,” he said.

“Our prioritization of what services we should build reflects the services which are more effective and efficiently implemented using pure digital forms. We have no desire to discuss how to divide wealth between your children, or what kind of trust to set up, or other key ‘big picture’ tasks advisers perform. But, we love delivering services which are constantly tracking fractional share lots and asset location drift. I can’t imagine human advisers saying they love doing that. I think that points to a great complementarity.

“And that’s where I see the evolution happening — advisers being able to offer more complex, human-focused, and valuable services because they aren’t wasting time on the maintenance and implementation details that are being handled better by us.”

Egan went on to outline what he saw as the strengths and weaknesses of digital advisers (and thus where traditional financial advisers could compete):

The Good

  • Math, analytics, data processing
  • Speed, precision, accuracy
  • Consistency, coherence
  • Considering many variables concurrently in multi-dimensional space
  • Availability (always on, always working, always monitoring your investments)
  • Not biased (won’t give different advice depending on your gender, appearance, race, etc.)
  • Not emotional
  • Inexpensive (near zero marginal cost)

The Bad

  • Having a revealing conversation
  • Reading body language
  • Understanding social structure (family, friends, business)
  • Knowing when customers are lying
  • Considering variables they don’t know about
  • Talking on the phone
  • Seeming like they “care”

If robo-advisers are here to stay (and we have no reason to think they are not), the biggest question for traditional advisers should be: How do I adapt?

“It is naive to think that the world of financial advisers would be untouched by accelerating technology trends,” said Tadas Viskanta, founder and editor of the investment blog Abnormal Returns. “The only question for advisers is how they can get on the right side of these trends as opposed to be disrupted by them. There is an opportunity for financial advisers to focus more on the adviser side as opposed to the financial side. For some this will not be easy. However, for investors it has the potential to make their investing lives cheaper, more consistent, and focused on those financial issues that matter most.”

The great benefit of a real financial adviser, he added, is to keep investors from making big mistakes during periods of market stress.

The day-long forum touched on a range of questions, including:

  • What do robo-advisers need to do to maintain clients as their needs change and/or they want to invest in more sophisticated strategies or other asset classes?
  • Are robo-advisers going to put pressure on all advisers to find new value-added services?
  • How will advisers prove their value to clients?
  • By providing investment services at a relatively low-cost, are robo-advisers going to put pressure on all advisers to either lower their fees or change how fees are assessed? For example, what is the potential impact of firms like Charles Schwab providing advisory services for free?
  • Should flesh and blood advisers command a premium over algorithmic investment services? And what does this suggest about how advisory services should be priced?

The full discussion is archived here: “Robo-Advisers: Opportunity or Threat? (Online Forum).” Simply scroll through the embedded frame.

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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.

Image credit: © Flem

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

3 thoughts on “Financial Advisers Need to Get “On the Right Side” of the Robo-Adviser Trend”

  1. Jim Pursley says:

    A welcome addition to the growing discussion around the advisor business metamorphosis. Enterprising Investor is another welcome addition in itself.

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