The “robo-advisors” are advancing and not much is holding them back. Wealth advisors are aging along with their best clients. The long-term viability of the profession is in question because of fewer new entrants. Young prospects show open contempt for the obscure way in which decisions are made, fees are calculated and collected and results are achieved. And, most mysterious of all, despite the intrinsic role it plays in nearly all other areas of life and business, technology has not yet fully penetrated the financial services arena.

Large banks and insurance companies still use mainframes, and serial mergers leave behind a patchwork quilt of internal systems that isolate companies from their clients. The mantra of “this is a relationship business” prompts self-deluding executives to delay major infrastructure upgrades for yet another year. The financial advisory business, especially at the high end, is stale and clinging to memories of better times and higher margins. At best, it can be described as a business in transition or, at worst, one that is ready for an overhaul.

Maybe this is why the advent of the robo-advisor has elicited such a hostile reaction from many advisors. They feel like sitting ducks waiting to be overrun by an army of robots and cyborgs who will gather assets, rebalance portfolios and interact with clients more efficiently than they ever dreamed possible. What’s worse, clients might actually like dealing with robots, quickly forgetting about the concerned calls and friendly gatherings that knit us together as humans while they adapt to a new normal of perfunctory communications and automated service that contradicts the importance of personalized planning and advice.

So, is the robo-advisor apocalypse imminent? Well, not so fast. Despite all the headlines proclaiming a revolution, it’s probably going to be an evolution—developing and changing in stages as new technologies emerge and advisors adjust to a changing role.

Version 1.0:
The Current Situation

Companies like Betterment, Wealthfront and FutureAdvisor have been dubbed robo-advisors for offering portfolio management online using algorithms based on modern portfolio theory and other philosophies.

Considering that a sizable percentage of flesh-and-blood investment advisors rely on turnkey asset management programs and model portfolios, these so-called robo-advisors are delivering the same type and quality of money management service—but with a tech-driven, user-friendly interface at appreciably lower costs. What’s more, lower fees mean that investment performance can be dramatically greater over the long term due to compounding.

Robo-advisors are just beginning to get traction. An expanding segment of technologically sophisticated investors, including many NextGen inheritors, will find robo-advisors to be their preferred option. However, it’s more likely that industry professionals will deploy these platforms as a way to streamline their practices. For example, Betterment recently established a strategic relationship with Fidelity Institutional Wealth Services that gives the firm’s registered investment advisors and their clients access to Fidelity’s platform.

The big opportunities in the early stages of robo-advisor platforms have to do with cost and scalability. Digital advisor platforms will bring greater transparency to costs and will likely challenge the long-standing fee structure based on assets under management.

At the same time, advisors can rely on technology to handle a portion of the activities they used to manage themselves, resulting in operational and cost efficiencies that can improve profitability (or be passed along as cost savings to clients) and service more accounts.

While innovative, most of today’s digitally based offerings are restricted to basic planning and investing. People that want a more comprehensive wealth management relationship will need a broader solution, the kind that has been perfected by seasoned wealth advisory professionals.

Individuals and families with significant and complicated assets, say upwards of $30 million in net worth, will still find greater benefit working with a cross-disciplinary team of experts who can coordinate things as diverse as business interests, tax and risk mitigation strategies, cross-border issues, estate planning and philanthropic goals.

Version 2.0:
The Next Phase Of Robo-Advice

Keep in mind that more sophisticated and responsive robo-advisors will succeed the current generation of offerings. Version 2.0 will likely evolve toward the provision of investment and comprehensive holistic financial advice geared to the needs and wants of clients. How is this possible? Cognitive computing. Think IBM’s Watson.

Watson interacts with people on their terms. It can read and understand natural language. It can reason and it can learn, thereby improving with experience. Watson, or something similar, will be used to provide recommendations and solutions across the entire range of financial services that investment advisors, life insurance agents, tax authorities, bankers and private client lawyers are delivering today.

Moreover, the future ability of robo-advisors to instantaneously sift through mountains of online data will enable them to recommend timely adjustments based on client-specific triggers, such as the birth of the first grandson, a child’s acceptance into an Ivy League college, the formation of a new business or a meaningful charitable contribution.

The integration of cognitive computing and financial services will be incremental, but also monumental. It will literally transform the industry in a variety of ways, further commoditizing what are already considered commodities in the realm of financial services and leveling the playing field on transparency, responsiveness and state-of-the-art technical solutions.

Such a deliverable could enhance or replace the back-office systems of many advisory professionals. While there will certainly be segments of investors—say digital natives and do-it-yourselfers—that will choose to engage directly with robo-advisor 2.0 platforms, eliminating the need for human interaction entirely, the most feasible application will still involve industry professionals due to the complexity of the various components in a client’s financial plan.

Advisors who choose to integrate this enhanced capability into their practices will create a more scalable wealth management deliverable with reduced costs and delivery times. These capabilities may paradoxically challenge the traditional value, process and cost associated with a full-service financial solution and pave the way for transformative change.

Version 3.0:
A Family Office For Everyone?

The following generation, robo-advisor 3.0, will usher in a new era of financial services for everyone. By adding process expertise to the technical expertise of Version 2.0, the future platforms will understand personal, financial and lifestyle concerns and respond proactively, essentially creating a personalized family office.

Today, family offices are restricted to the ultra-affluent due to the high cost associated with sourcing and managing the complete range of expertise and specialty services needed to meet the desires and preferences of an extended wealthy family. The technological advancements at the heart of Version 3.0 will enable the suite of family office deliverables to be cost-efficient for almost anyone, on a variable cost basis, and provide direct connections between the users and the vendors that provide the underlying services. This means that more people with less wealth will get better advice from fewer professionals.

Newly wealthy individuals and families face a steep learning curve when it comes to the range of strategies and services that can help them manage, protect and enhance their assets. A robo-advised family office deliverable could help mitigate the confusion, poor choices and over-charging that can easily happen when laypeople feel pressed to make quick decisions on financial matters.

It will take some time before a family office is available to anyone who wants one. While the technology exists today, it’s not widely available and is far too threatening to the franchise industries making up the financial services system. Instead, it will likely be integrated over time as vested interests and client inertia succumb to a more tech-comfortable population.

Timing aside, the thinking and functionality behind robo-advisor 3.0 represent a true paradigm shift that will democratize high-quality financial management in such a way that both the 1% and the 99% will benefit.

The Implications For Advisors
At least initially, we believe robo-advisor technologies can enhance the capabilities of advisory professionals in much the way that CT scans and MRIs help doctors diagnose and treat their patients more effectively. It’s worth acknowledging, however, that the robo-advisors of today are merely a harbinger of what’s ahead—a disruptive force that will impact the industry and many of its component parts.

When advanced robo-advisor platforms allow more people, including the wealthy, to efficiently and effectively structure and manage their assets, it will likely accelerate the divide among financial professionals. Astute, forward-thinking investment advisors will use this transitional period to leverage technology as a way to enhance both their businesses and relationships while strengthening and reinforcing the role they play as advocates, educators, coordinators and partners. And, in doing so, they may find their practices becoming more streamlined and successful.

At the same time, some established investment advisors with older and aging clients (many of whom are Luddites) may be able to complete their careers without having to materially change their business model. However, they too will probably be required to make some adjustments to keep pace with changing expectations for accessibility and transparency.

In the future, we expect to see fewer elite practitioners excelling at much higher levels, while the rest of the advisory universe is left behind to determine how it can best function in the new landscape. A considerable number of professionals will probably leave the industry in pursuit of greener pastures, while the remainder will be forced to adapt to diminished and possibly less lucrative roles, like relationship coordination, that facilitate a robo-advised deliverable.

More convincing, perhaps, may be the idea that e-mail, apps and smart devices will become the primary touch points for clients, further disintermediating many human advisors and replacing the cost-intensive and manual service models favored by big investment and financial services firms.

The Right Vantage Point?
In truth, today’s robo-advisors have a DIY patina that doesn’t suit extraordinary, complex wealth. Until solutions are developed that can intelligently address the unique challenges facing millionaires and billionaires, it’s unclear whether the high-end investor is a legitimate target market for these digital platforms.

But it’s possible we’ve been looking at the situation through a clouded lens. Until now, advocates of traditional industry methods have done their best to equate robo-advisors with, say, manufacturing facilities in Southeast Asia—operations that mass-produce low-end products for price-sensitive clients and compromise the livelihoods of the professionals we know and love in our communities. The product itself, in this analogy, is simply not up to the standards of the wealthiest clients who want and deserve handmade craftsmanship and bespoke items. For many high-end practitioners, robo-advisors have been something to ignore or deride, but certainly not embrace.

Instead, we could be thinking about the applications of technology to financial advice in the same way it is used in the music industry or high-performance auto racing or medicine. In these cases, incremental technological advancements heighten the customer experience (music), improve results (racing) or lengthen life span (medicine), which fuels the cycle of innovation and customer satisfaction. Amid these dynamics, technology is a desirable, even luxurious element that ensures the finest and most sophisticated solutions. It will be a great day when technology can be deployed to the same effect in financial services.

Adopting a slightly new and different perspective on the relationship between technology and advice may facilitate much-needed changes in our maturing business that can deliver benefits to everyone—practitioners, clients and regulators alike—while ensuring that the largest number of people possible can benefit from cutting-edge thinking and have a secure financial future.