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Domo Arigato, Mr. Roboto

In our May 2013 Maclendon Monthly, we discussed the effect of technological innovation in the labor market and how it has revolutionized industries. Technology, in particular robots, is a heavily debated topic. Technology can advance us in so many ways – but can there be too much of a good thing? For years people feared robots replacing jobs of workers. It was just a matter of time before technology infiltrated the financial services industry. In recent years we have seen the proliferation of automatic investing platforms that tout their ease of use, convenience, and costs. Since 2009, more than 200 companies have begun to offer online advisory services.

Robo – Advisor

The latest technological craze is the “robo-advisor.” This is a class of advisory service that provides online portfolio management with minimal human intervention. Collectively, robo-advisors managed an estimated $19 billion at year-end 2014. Robo-advisors appeal to some, but others may continue to find value in working with an actual human being. To clarify what a robo-advisor is and is not, we thought it would be helpful to explain the differences of working with a robo-advisor and a human advisor.

Robo-advisors make various investment management decisions based on information provided by the investor. They implement algorithms such as the Modern Portfolio Theory, which attempts to maximize portfolio expected return for a given amount of portfolio risk. The minimum investment for some of these online platforms can be as low as $5,000 and they typically invest in passive strategies such as index funds or ETFs. Robo-advisors can also be a cheaper alternative to human advisors with average advisory fees around 0.20% of assets under management plus the fees of the underlying investments. In a fast moving world, where people’s days are more fragmented than ever; the convenience of robo-advisors has also supported their appeal to many investors. Investors no longer have to schedule a formal meeting to sit down with their advisor to discuss their goals and determine if they are on track to retire or send their kids to college.

Robo-advisors have particularly caught traction with the younger generation. Millennials represent the largest demographic of robo-advisor users. Millennials are the most connected generation of our time and use their smartphones for many day-to-day activities. Growing up online, it is obviously a natural progression for millennials to start investing through their smartphones. Apps and other web based software have also made it easier for tech savvy millennials to understand and be comfortable with robo-advisors. As millennials enter the workforce and begin to build their savings, they do not immediately see the value of human advisors. The mentality of using human advisors later in life or once they become wealthy enough has also driven the growth of robo-advisors amongst millennials.

Human Advisor

All of this sounds like a no brainer right? No more meetings, cheaper fees, set it and forget it automatic investing; why would you go anywhere else? Although robo-advisors look like a great alternative to human advisors, there are aspects of a human advisor the robo-advisor are not able to achieve. To start, robo-advisors are not able to provide advice or guidance on complex financial matters outside of your portfolio. Everything from debt management, insurance needs, estate planning, etc., the robo-advisor will not be able to add the value of a human advisor. This is where a human advisor truly shines by bringing all of these aspects to work together.

The holistic approach and level of service from a human financial advisor is what and will always separate us from the robo-advisor model.

Although we may sometimes feel like a robot in our actions: wake up, eat breakfast, work a full day, hit the gym, eat dinner, and go to bed, repeat we are far more complex and superior than robots. We are generally considered highly social beings – we love relationships. When you hire a human advisor you receive more than just a portfolio allocation with automatic investing. You create a relationship with someone who knows everything about your financial picture; a financial “pilot” that can tell you to fasten your seatbelt during turbulence and help you achieve your goals and a safe landing. A human advisor knows what you might have on the horizon and how to adequately plan for the future. They understand the complexities of your business and family. The relationship built between advisor and client is also an intangible value added that may not add to the overall return, but pay dividends (metaphorically) when a client needs a sounding board to talk with or someone to bounce ideas off of.

Aside from the above mentioned attributes of a human advisor that a robo-advisor cannot compete with, the one attribute that sticks out the most to us is investments. Why would you go with a platform that offers limited investment options? As an investor you want to have access to the most robust investment universe available. You want availability to individual stocks, bonds, alternatives etc. At the end of the day we are here to generate positive returns in the most risk adjusted manner. A human advisor has the ability to provide any tool they feel necessary to achieve their client’s goals without having to select from a predetermined list. The flexibility of investment options through a human advisor can be the difference between achieving the retirement you had envisioned or not.

In our view, robo-advisors are best suited for those with fairly simple financial situations. If you need a platform that is automatic, you are fee conscious, and want a passive strategy, then a robo-advisor may be for you. But remember, you get what you pay for. At Maclendon we say that fees only matter in the absence of perceived value. The use of robo-advisors is not going away. As a human financial advisor and business owner we need to adapt to our competition. Robo-advisors will never replace human advisors, but they are continuing to take market share.