NASHVILLE — Never turn your back on the ocean, even metaphorically. At the NAPA 401(k) Summit this week, advisors are here to see what’s brewing in the choppy financial industry seas. One wave to watch is that of the robo-advisor trend.
Robo-advising is not as futuristic-made-for-movies as it sounds. It’s simply an online software advisory solution that uses algorithms to pick investments to meet a client’s goals.
Still, this technology is making a splash in the financial industry.
A recent study from Scottrade reveals that more than nine in 10 RIAs believe robo-advisors will become more prevalent in the financial industry over the next two years.
Forty percent of RIAs say they see robo-advisors as complementary to their business, while 23 percent say they view them as competition. No matter whether they view it as threat or opportunity, 28 percent of RIAs say they currently offer algorithmic-based investment advice and 19 percent plan to offer it in the coming year. Interestingly, the study says that RIAs managing $500 million or more in assets are more likely to offer these services than those with less than $500 million in assets.
What do consumers think of it? They’re interested, according to a study from consulting firm AT Kearney. The firm says in the next three to five years robo-advisory services move into the mainstream among U.S. consumers.
Whether the investments selected by the algorithm software are all from one firm’s stable or are the best possible chosen from a variety of offerings, depends on the robo-advisory solution. And whether clients adopt it quickly or lag somewhat will also depend on demographics and tolerance for risk.
According to the AT Kearney study, the first wave of adopters, what it calls “pioneers” will typically be clients who are younger, say, under 35 years of age. They will be more sophisticated at investing. Their interest will more likely be in low-cost investing.
The next wave, or the “enthusiasts” will be slightly older, but less sophisticated at investing—more of this population will be at the novice level of investing. Their interest in investing will hover around moving from liquid funds to mutual funds and exchange-traded funds, ATKearney says.
The wave of later adopters after that will again be even older, also less sophisticated at investing, with some share of retirees in this group.
The forgivable question is this: Will your job be replaced by a robot?
Welcome to the question that over the last decade has put fear into the hearts of many, from umpires to tax preparers to language translators to sports bloggers. The short answer is “no.” The longer answer is “What you can offer that a robot can’t is what might become most important.”
As Michael Kitces says in his blog: “… in the end, robo-advisors may be less of a threat to traditional advisors, than simply an acknowledgement that inefficient advisors that don’t systematize and utilize technology will be increasingly threatened by those who do – whether robot, or technology-augmented human.”
Suffice it to say, this is an area of opportunity for many. But whether it is or isn’t for you, like any good ocean watcher, you must not turn your back on it.