As the financial services industry slowly but steadily becomes more tech-savvy and technology-enabled, including the adoption of online models for the delivery and implementation of financial advice, the line of where human financial advice ends and “robo” automation begins is becoming increasingly blurry. So what’s the difference between a “robo-advisor” providing online financial advice, and any number of human advisors who do the same thing using online meeting and collaboration tools like Skype, GoToMeeting and web-based financial planning software?
Given that both humans and robo-advisors can deliver advice in an online medium, the key distinction is not actually about being online at all, but about how the industry itself is crafted and delivered: in the end, does the advice clients get come from a human or a (human-designed) computer algorithm?
The difference matters not only in terms of the advice itself, but also the underlying cost structure; as the robo-advisors themselves advertised in their early days, a key reason for their ability to deliver low-cost solutions to consumers was their elimination of “expensive” human financial advisors.
In the end, it remains to be seen whether or what forms of financial advice consumers will prefer to receive from an algorithm versus another human being (especially given some of the potential cost differences between the two). What’s becoming clear from the attempts of both in the online world is that building trust online to get clients in the first place is difficult in a low-trust industry like financial services; simply put, online financial advice is not an “if you build it, they will come” kind of business.
Nonetheless, some of the lines about where each can excel are now being drawn, as robo-advisors increasingly focus on narrow, specific problems that can be addressed with technology and an algorithm alone—commoditizing those solutions in the process. Meanwhile, human advisors are increasingly driven to financial planning as the “anti-commoditizer” by providing a more comprehensive financial advice solution that delves into the complex realities that consumers face when viewing their overall financial picture.
Human Advisors Delivering Online Financial Advice
With the ongoing rise of the Internet and our transition into the digital age, going “online” is increasingly a medium for conducting business. Over the past 10-15 years, it’s been about buying products online, and increasingly it’s about buying services online as well, including financial advice.
In fact, as one recent industry study just showed, advisors are already beginning to meet with their clients less often face-to-face, using online content and even online “virtual” meeting tools (e.g., Skype and GoToMeeting).
Notably, the technology-supported delivery of financial advice in an online medium really just represents a transition to a different means of communicating, interacting and implementing that advice with a client. In other words, it’s not about the replacement of the human being in the advice process, but about the replacement of delivering that advice in a face-to-face meeting.
More accurately, we’re witnessing the replacement of delivering that advice in an in-person meeting, as the reality is that the availability of video meetings means online interactions really are “face-to-face.” They just don’t end with a physical handshake at the end!
From the human advisor’s perspective, the potential for delivery of financial advice in an online medium breaks the historical link between the geography of the advisor and the geography of the client. In other words, finding a financial advisor, and running an advisory firm, becomes location-independent of the client. In turn, this creates a potential to simultaneously target a more focused clientele (i.e., a niche), yet have a wider pool of potential clients (i.e., being able to work with anyone, anywhere, regardless of geographic location). These possibilities are beginning to change the way that advisors grow and market their firms in the digital age.
Yet at the same time, the potential for the delivery of financial advice in an online medium using technology has created another possibility as well: the delivery of financial advice using the technology alone, without the human being: the robo-advisor.
Defining the Robo-Advisor
While the “robo-advisor” platforms happen to be delivered online, that characteristic is not their defining feature. As noted earlier, a growing number of human advisors are delivering their services via an online medium as well.
Instead, the quintessential feature of the “robo-advisor” is that the advice itself is algorithmically derived and delivered by a computer. While often not literally anthropomorphized into a physical “robot” (in fact, meeting face-to-face with a physical manifestation of a robot would no longer be online!), the fundamental point of the robo-advisor is that the client’s advice is crafted not with the involvement of a human being to analyze the client’s individual facts and circumstances, but instead by a (human-designed) algorithm designed to determine needs and recommend appropriate solutions for implementation. Perhaps a better description of the service would be “algo-advisor” rather than “robo-advisor.”
The reason that non-human algorithm-constructed and online-delivered advice is so fundamental to the definition of the “robo-advisor” concerns not the advice itself, but also the potential efficiencies it seeks to achieve by removing human beings from the advice-construction-and-delivery equation.
As robo-advisor Wealthfront noted when it launched in 2011, the removal of human advisors and the delivery of advice online was a key aspect of its 0.25%-of-AUM pricing model; similarly, when Betterment changed its fees in early 2012 to the current 0.15% to 0.35% structure, it also noted that its ability to automate investing without using “flesh and blood money managers” was a key aspect of its ability to be a low-cost solution.
Parsing the Online and Robo-Advisor Landscape
Given these distinctions, it’s important to recognize that while “robo-advisors” are certainly a subset of “online financial advice” solutions, so are human beings who work in an online medium. In fact, it was the humans who started delivering advice in an online format long before the first “robo-advisor” platform was ever seeded and launched. Simply put, it’s not the mere presence of being available for service online that defines the robo-advisor category (or every human using Skype and GoToMeeting would automagically become a robot).
Accordingly, while the label is often misused, new financial services startup solutions like Personal Capital and LearnVest are not “robo-advisors.” An in-depth look at them reveals that the advice is crafted and delivered by human being financial advisors who just happen to work in an online medium (a point that Personal Capital has taken pains to point out itself).
Similarly, the recent new Vanguard Personal Advisor Services solution is not a robo-advisor either. The advice there is also created and delivered by human beings. although Vanguard is using its existing size and scale to drive down its client acquisition costs to reach a wider market at lower minimums while trying to price its services similar to other true robo-advisor platforms.
Given this context, the true robo-advisor platforms are those like Wealthfront, Betterment andFutureAdvisor. You could argue that services like JemStep and SigFig could be classified in this manner as well, but there’s a notable difference in those two services. The former takes control of the investments and implements on the client’s behalf, while the latter simply provides algorithmically-determined guidance and recommendations that clients must then implement themselves.
The bottom line is that not all “online” advisors are “robo”-advisors, and in fact many of today’s new financial services technology solutions don’t really belong directly in either category. The mere fact that something is “technology” and has to do with investment or financial advice don’t make it “the next robo-advisor”!
Online Financial Advice in the Long Run
It remains to be seen which forms of online financial advice will gain traction in the long run, and the mere fact that advice is available online will not by itself be the key to success. Financial advice is not an “if you build it, they will come” kind of business: the low trust level that financial services has with the American public continues to limit how quickly new solutions can grow and how widely they can be offered.
If the current trends thus far are any indicator, algorithmically-based solutions may be confined in the near term to finite, specific, concrete problems that they can tackle and solve, rather than the full breadth of complexity that is a “comprehensive financial plan.”
Virtually all of today’s robo-advisors have been focused on tackling the specific challenge of how to implement an investment portfolio (or at least review for poor holdings), and some of the newest entrants like iQuantifi are trying to look at a slightly broader set of goals, but few are promising the full breadth of personal financial advice. A (rough) survey of the landscape, based on the breadth of advice and the crafter of the advice, is shown below.
Even within their algorithm-driven specific domains, it remains to be seen whether the “robo” platforms will be able to actually drive behavioral change to get people to improve their financial situation, or whether the solutions will be derailed by the emotional panic of a bear market or the sheer inertia that becomes apparent when trying to change financial habits.
On the other hand, progress has been limited for human online financial advisors as well. Some of the earliest efforts to support the human delivery of advice online have struggled or closed their (virtual) doors entirely, and advisors over all are still struggling to develop their own skills at building trust online and fully utilizing the technology that is available.
Though there is clearly some rise in the use of the web and online tools to deliver financial advice, best practices for execution are still not yet clear. However, it is increasingly evident that human advisors who attempt to get paid “full price” to deliver what is becoming a technology-commoditized solution—like constructing and monitoring a passive, strategic, asset-allocated portfolio—are becoming endangered. Moving to more comprehensive financial advice solutions may be essential for human advisors to avoid having their business models totally commoditized. At the same time, an emerging crop of “TAMP/Rebalancing 2.0″ solutions are emerging, from Betterment Institutional to the just-announced UpsideAdvisor, that will give many of the “robo” capabilities to human advisors as well.
In the end, my own guess is that we’ll find there are certain things that the computers and “robo” solutions do well, such as any task that is repetitive and is conducive to automation.
Platforms will emerge (and Betterment Institutional and UpsideAdvisor may just be the emerging edge) but humans can’t be removed from the equation entirely, both for the sheer complexity that arises in real-world financial planning situations and because in we are social creatures who won’t be accountble to a computer the way we are to another human being.
As a result, the best solutions in the long run are likely to be a combination of both: the part-human and part-computer “cyborg” solution that allows technology to do what it does best, and for humans to do what they do best, all in pursuit of bringing down the cost and widening the accessibility of financial planning for consumers.