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

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.