The robos are coming! The robos are coming!

Zzzzzz.

I just don’t get what all the fuss is about.

Robo outfits are in a different business than financial planners like me. 

Legally we are both registered investment advisors and rely heavily on technology to execute our investment process, but that’s about where the similarity ends. Many (most?) will be out of business in the next few years.

Make no bones about it, we are indeed in entirely different lines of work. Sure, a tech-based operation can crunch some numbers and create some charts and call it a “financial plan,” but real planners provide value in many ways a robo service does not and cannot.   

The financial world is a minefield for consumers. This has created high demand for good financial planners. Social Security is a web of over 2.700 rules. Pension plans continue to disappear. The tax code is a convoluted mess.

The public is being forced to make more decisions about increasingly challenging topics about which they have no training. They are inundated with information from a variety of media with no ability to sift through what is good information or what is actually relevant to them.

Compare the services provided by a good financial planner to the offering of robos or other cut-rate providers and it is clear the consumer is not getting the same thing from robos. It is not even close. They're getting a limited version of a small portion of the services a good financial planner provides.

The less people want to be just a number, the more likely they are to want to work with people who genuinely care about them rather than a machine and an 800-number or e-mail address.

I understand that some folks feel threatened by the robo’s low fees. If all you are doing is collecting assets from anyone who will open an account, then maybe you should be worried. In that case, you are in the same business as the robos and they have more marketing oomph than you ever will.

And marketing is an issue.

Let’s go back to Marketing 101. If the buyer believes product or service A to be equal in quality to product or service B, they will almost always make their purchase decision based on price.

This is another source of angst for advisors. In order for a low-cost provider to compete, they have to either present themselves as being at least equal in quality to higher cost providers or convince the buyer that the difference doesn’t matter. Messaging like that can tick people off.

Another basic concept in marketing is that a portion of the population that will always favor the low-cost provider simply because they buy almost everything based on price. Another portion isn’t wired that way but may buy into the “it's all the same so buy the cheap one” or the “sure, with all the extras, the other costs more but you don’t need any of the extras” pitch. 

If you are making a decent effort to communicate the depth and breath of what you do and deliver on your promises, you don’t need to worry about this. The people who can’t see the difference, or won’t pay for it, were never prospective clients for you anyway.  The robos can put a lot into marketing, but they will largely be competing for people that aren’t good candidates for you and the robos will be competing against other robos.

I say “decent effort” rather than something stronger for a reason. You don’t have to be a great marketer to avoid clashes with the robos. Don’t forget another basic marketing tenet: The price you charge communicates relative value.

When looking to buy something, most people assume that the low-cost provider is also the low-quality provider. Think about it. You see three premade sandwiches at a deli counter that look the same. The prices are $8, $9 and $4. Aren’t you suspicious about the $4 sandwich?

Studies show the $4 sandwich will be the worst seller because people assume it is of the lowest quality.

Who hasn’t had the experience of buying something because it was cheap and finding out just how cheap it was. If you aren’t playing the “who is cheaper game,” you are less likely to be perceived as offering a cheap quality product.

Office Depot ran a great ad about a slick hair salon opening across the street from a barber shop. The ad presents the salon as a potentially formidable competitor because of its flashy style and $6 haircuts. The barber counters with a simple banner: “We fix $6 haircuts.”

The more the robos scream “We’re cheap!” the more people will assume the offering is limited,  simplistic or otherwise, well, cheap. The ones who don’t assume and actually look to see why the robo fee is low will find you addressing many more interrelated financial issues for them and they won’t pay the robos any mind because automated investment management is not actually what they need or want. 

A cheap portfolio with a reasonable asset allocation is hardly new. Funds of funds, balanced funds, even target date funds have all been around for years. They appeal to some and not others. Robos will appeal to a certain segment of the population that is different than the segment that is attracted to real financial planners.

Some argue that young tech savvy people prefer an automated experience.  I’m sure that is true to a point. Our firm continues to adopt systems that automate many of our processes and aspects of the client experience. 

For the 25-plus years I have been advising people, technological advances have been nothing but helpful to my practice.  I expect the increased technology competition to result in similar benefits, though I suspect they won’t come directly from today’s robos. Simple economics indicates many of these robos are going to fold. 

Those people I talked about earlier that always want cheap or don’t want to believe the difference matters—that’s the group that is most likely to consider a robo service. Robo A has to beat out Robo B for their business.

At the robo rates, the robos need to win a lot of those battles to survive. The technology-based, direct-to-consumer model isn’t so great. Just ask Bloomberg or LPL.

As a result, we already see some robos trying to bring their technology to advisors. This is a trend to watch, but many that try this will also fail.

A lot of firms do not want to outsource investment management. Of those that do, they already have a slew of established choices. If you are going to outsource investment management, you are going to compare the robo offering with the likes of BAM or Portfolio Solutions—organizations that have a solid track record of working with advisors and little doubt about their survival.

Moreover, when one digs into what actually happens with the client’s money, the robos have some evolving to do. Most only handle certain account types.  Only a few handle legacy holdings at all, let alone well, and all look significantly limited regarding the types of securities that will be used.

I was poking around the site of one the most prominent robos and it didn’t even ask me about time frame or cash flow needs before it recommended a portfolio. Those are two pretty important data points when constructing a portfolio.

Most robos won’t survive as strictly a direct-to-consumer or advisor outsource provider, but I do see some potential. I am optimistic that the user experiences are going to improve and be adoptable by firms like mine. This is already happening, but as the competition between robos intensifies, the speed of progress should pick up a bit.

The speed at which a massive amount of information is thrust at the public makes navigating the complexity of personal financial issues all the more difficult. Making sense of it all within the context of each family’s unique attributes is a service that is desperately needed and wanted by many.

A real advisor is far more likely to identify threats to and opportunities for clients than a tech-based enterprise. It isn’t just because there is so much more to personal finance or that only a human can genuinely care about another person’s well-being.   

It is that the lower the rate and the more tech-based, the less likely there will be any effort to look for all the things that matter to that client. A cut-rate outfit won’t look or care because they simply can’t afford to.

Dan Moisand, CFP® has been featured as one of the America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines.  He practices in Melbourne, FL.  You can reach him at [email protected].