John Ndege, founder and CEO of Pocket Risk, is predicting a collapse in the world of robo-advisors.
Many financial advice providers are purchasing robo-advisors or building their own robo-like tools in hopes of rapidly acquiring and onboarding new clients, a tactic that Ndege says is unlikely to succeed.
“Investment management is already being commoditized; advisors are struggling to establish differentiation, and they’re doing it in the wrong way,” says Ndege. “Why should someone work with one advisor rather than another based on technology or a risk-tolerance questionnaire? This part of the process is not a prospecting element. Client acquisition, planning and portfolio allocation are nuanced activities.”
As robo-advisors fail to meet the industry's client acqusition expectations, most will be altered or scrapped to favor personalized, human-led financial advice.
On Tuesday, Ndege announced a complete re-launch of his software, Pocket Risk 2, a digital risk tolerance questionnaire that attempts to holistically measure an individual’s risk tolerance and capacity.
The Pocket Risk’s advisor clientele is mostly U.S.-based, represents multiple industry segments and manages over $35 billion. In its new format, the tool incorporates aspects of behavioral finance in measuring client sentiment towards risk.
Rather than an engine of efficiency, Ndege presents Pocket Risk as a tool to make financial advice more effective. According to Ndege, trust and awareness are the largest barriers between the advice industry and new client acquisition, not technology. Thus, advisors would be better served focusing on delivering financial plans rather than building the next great client portal or onboarding application.
“There’s been too much focus on these quantitative tools,” says Ndege. “Advisors are under fee pressure, there are fewer products that generate revenues, and they’re in a difficult situation. They’re probably thinking ‘our solution is to get more clients by creating more technology,’ but that’s not really their challenge. The primary determinant of an investor’s success is their behavior and their ability to stick with a plan.”
Most risk-tolerance questionnaires, particularly the ones attached to commoditized robo-advisors, only measure a client’s risk tolerance -- how much risk a client is willing to take. The hope is that by understanding a client’s risk tolerance, an advice provider may determine the maximum amount of risk that may be taken in a strategy that the client would be likely to stay with over the long term -- an oversimplified view of investor behavior, says Ndege. “Our tools are designed to help advisors learn about the client’s behavior and sentiment. You can’t do that by asking two or three questions before throwing someone into a portfolio.”
The bridge between information gathering and plan execution is still best built by an advisor, says Ndege, as a roboadvisor’s limited investment strategies may not fit the nuances of an individual’s personality. Clients may also struggle to trust plans designed by an algorithm.