Extinction by Robo Advisor
This robo advisor thing? It’s not a new idea. Back in the pre-internet dark ages, you would order Value Line or Morningstar newsletters, and they would contain in the back several model portfolios for those too lazy to read the actual analysis.
Fast-forward to the last 15 years, when every discount brokerage firm created a little tab at the top of its website labeled “research.” Go ahead—click it. Along with worthless research from some third party or sub-par in-house stuff, you’ll find model portfolios. Just answer a few inane questions about how you think you would react to a setback, your time horizon and other matters that you’ll lie about, and voila! One of five model portfolios will be provided. Want a high-priced active mutual fund portfolio that won’t meet its benchmark? Just tell us if you would sell during a correction or buy more, and the right allocation is a click away.
Fast-forward to the last few years, since 2009, a time when most diversified portfolios have gone only go one direction—up. Now the robo advisor has arrived to help. People who won’t use a free model online will apparently now pay a small fee or percentage of their assets to have a computer click the “buy” button and rebalance a few times a year. Because, bells and whistles aside, that’s pretty much what the robo advisors are promising. Some investors are lazy or completely lacking in confidence, but some are smart enough to know that a modest portfolio doesn’t need a high-priced manager.
Let’s get some perspective here. Back in 1999, I started a homeless shelter for doctors kicked to the curb after WebMD booted up. I eventually had to return donor money for lack of interest. Next, when LegalZoom started up, I tried to open a nonprofit retraining center for attorneys. Another failed philanthropy.
I hear whispers from advisors who are convinced that robos are going to drive the profession into extinction. Relax. Nothing could be better for our business than computerized pie-chart vending machines. Remember that we’re in a bull market. If robos can gain market share over the next few years, they will capture plenty of amateurs who will freak out during the next bear market, fleeing to professionals who can think for themselves.
Second, the emergence of robo advisors will slow the already anemic growth of lazy stockbrokers-turned-financial-advisors charging assets under management. Oh, how I want them out of the business! They charge too much and do too little, and they make the rest of us look rotten.
And then, when the clients do have enough money for a really good advisory firm to manage, their money is less than it would have been if it had just sat in some Vanguard index funds for 20 years.
Which leads me to my most important point about robo advisors: They incubate smaller amounts of capital at a low cost—to me. People with real money want a financial plan, tax and estate planning, real estate consulting and multigenerational counseling. While we still make the bulk of our earnings charging on assets we manage, the best in the business are in the business of consulting.
So nothing would please me more than to have prospects walk into my office toting a low-cost portfolio administered for years by a computer. Since some charlatan hadn’t poisoned the well for the rest of us, the prospect would have a good attitude about long-term investing. The assets would probably be larger than if he or she hadn’t rebalanced by computer. Most important, the prospect would know the satisfaction of having something or somebody manage their money for them. Robo advisors train our future clients to rely on others. And when people get older and have more complex financial arrangements, they want human advisors who can appreciate the complexity of both their portfolios and their lives.
In the end, we all need something that keeps us fit. Robo advisors allow human advisors who can do complex work—and aren’t afraid of working hard—to prosper. We now must provide more value to our clients than we take. Take it from someone who used to love to charge big commission and do little actual work: Success is sweeter when you earn it.