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.