In last month's issue, Clara Shih, the founder and CEO of Hearsay Social, penned an insightful, provocative opinion piece in Parting Shot warning advisors to get their act together or face the same fate as travel agents. She cited The Second Machine Age, a book by MIT professors Erik Brynjolfsson and Andrew McAfee that predicts automation, big data and artificial intelligence will challenge knowledge workers in an array of professions, including medicine, law, financial services and even education.

The thought of robots replacing professors and lawyers is somewhat amusing, but who am I to say it won’t happen? Still, I have a difficult time envisioning a future Vice President Al Gore and Texas Gov. George W. Bush wheeling a couple of robots into the Supreme Court to decide a presidential election.

What is questionable in Shih’s column is the analogy between financial advisors and travel agents. As she correctly noted, the number of retail travel agent locations has declined over the last two decades by about 65% from 34,000 to 13,000. In contrast, the number of people offering retail financial services, including advice, has remained relatively flat at just over 300,000, though consultants offer varying methods to measure the size of this universe.

The wirehouse transactional model is definitely in decline and consultants like Cerulli expect independents to overtake wirehouses by 2019. But if transactions were the only service the retail advice business was providing, the number of advisors and brokers would have declined in a parallel fashion mirroring that of travel agents.

Those travel agents who have survived have learned to up their game, as have most financial advisors over the last 15 years. Diversification and asset allocation are no longer enough. Any advisor who doesn’t expect and plan for the competitive environment to intensify over the next decade, among humans, much less robos, probably won’t be in business in 2025. But since the average advisor is estimated to be 55, many are likely to retire voluntarily and happily.

As for the current generation of robo-advisors, they face their own challenges. Despite the vast amount of venture capital they’ve attracted, most of the 80 or so robo-shops are struggling with virtually no revenues like the dot-coms of the 1990s. Some, such as Personal Capital are actually hiring human advisors.

Giant custodians like Schwab are offering competitive services for nothing and using their own proprietary funds and ETFs to eke out miniscule revenues. Several sources report that many robo-advisors managing money suffered outflows of 20% of assets last September and October when the stock market experienced a modest 9% correction. Imagine what would happen if a real bear market came along?

So the guess here is that both human advisors and robo-advisors will need to re-engineer their business models and increase their value propositions over the next decade. If we’ve learned anything over the last two decades, it’s that the 21st century economy is becoming increasingly Darwinian.

Evan Simonoff
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