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Robo-Advisors Came to Slay Industry Giants, but Instead Schooled Them

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What You Need to Know

  • Robo-advisors have validated human advisors' ultimate value.
  • VC-backed robo-advisors never gained much traction, and eventually were eclipsed by the incumbents they were trying to disrupt.
  • But there's no disputing that they've forced established industry players to innovate.

For a lot of us, the fact that the modern robo-advisor movement is now in its 13th year is remarkable.

It seems like it was just the other day that these potential disrupters were entering the scene to transform wealth management and inflict significant damage to the financial advisor space, just as digital players had done to other traditional industries.

Backed by substantial investment from venture capitalists, these tech players drooled at the chance to relegate human financial advisors and legacy investment firms to the ranks of taxi drivers, travel agents, retailers, and music and video store operators to capture significant market share in a multitrillion-dollar industry.

But as we know, that’s not what happened. Despite the real fear and loathing from the wealth management industry when the first robots appeared, human advisors’ ultimate value was validated, and humans remain at the forefront of the delivery of financial advisory services. The world domination goal of those VC-backed startups was not realized; however, they did ignite change that continues to reverberate across wealth management.

History Lesson

Now that we are more than a decade into the movement, it’s a good time to look back and see what actually happened, what lessons were learned, and where innovation in our sleepy corner of the financial services industry actually was accelerated for the good.

Back in 2008, two startups both launched their aspirations for regime change: Wealthfront and Betterment, followed by a handful of similar players, such as SigFig, Future Advisor, Jemstep and others. Of course, the very first robo-type advisor, Financial Engines, was launched 25 years ago, in 1996. But Financial Engines was focused on the retirement plan sponsor industry, not necessarily individual investors directly, so we’ll start the clock in 2008.

In the late 2000s, disruptive consumer technology was just starting to get rolling with Apple’s introduction of the iPhone in 2007. And we all know what happened from there, as this innovative consumer device took hold and fundamentally altered how people accessed retail goods and services, forever changing those industries.

Thus, it seemed only natural for the leaders of Wealthfront and Betterment to bring that arrogant, disruptive ethos to their companies and prognosticate the death of the human financial advisor as an attention-getting PR ploy.

In 2012, Betterment CEO Jon Stein wrote the infamous blog post “Financial Advisors Are Bad for Your Wealth,” a highly critical article with an accompanying picture of a pig with a human head. This posturing of human advisors as bad and technology as good ignited a great debate as to whether or not human financial advisors were really worth 1% fees.

Betterment and Wealthfront did not prioritize making friends with the industry and invested instead in anti-advisor PR efforts in a bid to gain relevancy. They did so as the early robo-advisors were charging a quarter of an advisor’s fee for building portfolios based on a highly simplified risk tolerance profile, placing investors in accompanying models of low-cost ETFs and rebalancing them along the way, all through automation and algorithms.

On the surface, this approach mimicked what human advisors were doing. But the VC-backed robo-advisors never did gain much traction, and they eventually were eclipsed by the very incumbents they were trying to disrupt.

New Challenges

“Wealthfront is really just E-Trade with an expensive coat of paint!” Aaron Klein, CEO of Riskalyze, famously tweeted. This simple statement put in perspective that it was all really just a segmentation scheme, as early adopters of the robo-advisors were do-it-yourselfers who have always been attracted to low-cost options, and not clients with significant wealth and more complex needs that human advisors have typically served.

Ultimately, there were no barriers to entry, and industry incumbents such as Schwab, Fidelity, Vanguard and even Merrill Lynch were able to quickly launch similar functionality, but with a devastating twist — they offered it “free.” Thus, the VC-backed disrupters were ultimately disrupted by the incumbents they were trying to displace.

This leadership transition to the large online brands created a strategic shift for the early robo-advisors, as many of them pivoted to business-to-business platforms and actually supporting advisors with back-office automation, or were acquired by legacy companies and asset managers as a distribution play. Their days as direct-to-consumer investment platforms were fundamentally over, with just Wealthfront and Betterment surviving as independent entities.

In a further irony, both of these original players also have pivoted to other venues outside of investing, most notably to offer banking services. No longer competitive with “free” robo-advisors from well-resourced and branded players such as Schwab and Fidelity, they needed to find other ways to make a living and have successfully done so by harvesting cash.

Digital Pathway

But give credit where credit is due. While the original robo-advisors ultimately haven’t been successful, they did ignite a digital movement in wealth management. There is expected to be more than $1.3 trillion in robo-advisor managed accounts this year, with a compound annual growth rate of more than 20% year over year.

Additionally, the elegant user interfaces and simplified, automatic account opening that the robots introduced were total game-changers. Wealth management technology had been lagging in modern, consumer applications; after years of underinvestment, those gaps were beginning to widen.

Clients were starting to notice as well, adding to the pressure for firms and advisors to deploy these innovative new features. Most notably, client portals, mobile applications and digital account opening became the No. 1 new technology investment advisors and the firms that support them began making. The industry still has quite a bit of catching up to do, but credit the robo-advisors’ digital movement for accelerating these needed upgrades.

Another key change that the robos brought about was helping advisors better articulate the value that they provide outside of investment results in terms of behavioral finance issues, hand-holding, empathy and being there for investors in times of chaos and change. People are funny about money and want to talk to another person to help them with the very personal issues around finances, achieving lifelong goals while protecting their families.

Indeed, today there are new professional designations that advisors can obtain around behavioral finance and related issues.

Robo-advisors continue to improve. With the promise of AI, machine learning and other predictive technologies, their algorithms will be able to provide more tailored advice, further accelerating the commoditization of investing.

And human advisors will be able to leverage these new tools and provide another positive step in elevating humans from a low value-added role to one of importance in their clients’ lives.

As a result, the great robo-advisor experiment continues and will be played out in the ongoing digital transformation of the industry. Despite its complexities and reputation as slow-moving, the wealth space is resilient and adaptive to change.


Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a consulting firm to the wealth management industry. He can be reached at [email protected] or on Twitter @NexusStrategy.