Everyone seems to have forgotten that robo-advisors are asset management firms. We are so mesmerized by their cool client engagement, on-boarding and communications functionality that we think of them as technology companies. They are not. They sell portfolios to investors.

Why does this matter? Because their actual product—managed portfolios—will have a huge impact on the financial futures of those who use their services. The focus should be first and foremost on those portfolios and not on the technology that surrounds them. The client experience is important, but not as important as the people and process behind the portfolios and the performance they produce. Too little attention is being given to these factors.

It matters for another reason. If we see robos clearly as asset managers, we will hold them to the same fiduciary standards that we impose on more traditional firms that manage portfolios. Now, however, because the robos have helped democratize asset management, challenged traditional pricing and vastly improved the client experience, we look the other way when it comes to how they discharge their fiduciary duties.

Traditional advisory firms use a variety of tools to learn about their clients and shape their recommendations to them. These may include questionnaires, financial planning software and other analytical programs. But advisors always talk to their clients. They ask them questions. They interact with them and use their knowledge and experience to interpret what they hear.

Can you imagine the SEC allowing a traditional advisor to make portfolio recommendations based solely on the answers to a 10- or 12-question online questionnaire? No conversation, no interaction, no personal contact at all. Just the output from a brief multiple-choice test. No, they would view such a process as a failure in the advisor’s duty of care to clients. Yet this is how robos are routinely allowed to discharge their fiduciary duties.

Robos: Spawn of TAMPs
Robos are the direct offspring of TAMPs and should be treated that way. TAMPS, or “turnkey asset management providers,” emerged in the late 1980s and early 1990s to offer outsourced portfolio management services to financial advisors. Early TAMPs like ADAM Investment Services (for which I worked), SEI and Russell were affiliated with pension consulting firms. Their primary goal was to make “institutional quality” asset allocation, manager selection and performance reporting available to financial advisors.

But TAMPs and technology have always been intertwined. At ADAM, we sent a stack of floppy disks to each advisor we worked with every quarter. The disks contained presentation software and research tools that were viewed as cutting-edge in their day. Our technology gave us a competitive advantage for a while, but over time the focus shifted to where it always should have been: on the quality of our investment process and the performance of our portfolios.

As the TAMP industry evolved, success depended increasingly on the adept use of technology. At PMC (where I worked after PMC purchased ADAM), we operated multiple portfolio accounting systems, developed highly customizable performance reporting and billing capabilities and created interfaces with multiple custodians. The focus was on industrial strength back-office technology. Our tech budget rivaled our investment budget.

Our technology allowed us to offer a supermarket of managed mutual fund portfolios and separately managed accounts, which opened new outsourcing possibilities for advisors. AssetMark, Brinker, Lockwood and SEI also developed variations on the supermarket theme. Initially, the focus was on the vast array of choice TAMPs could offer rather than the individual investment products themselves. Technology provided the “wow” factor. But the novelty of choice eventually faded and attention returned to the quality of the products on the shelf.

21st Century TAMPs
As we moved into the 21st century, new firms like Envestnet and AdvisorPort brought refined front-end technology and web-based services to the TAMP world. Unlike early TAMP technology, which focused on back-office efficiencies, this new technology was advisor-facing. Their technology was so dazzling it initially overshadowed their investment offering. Eventually, web-based front-end technology became more commonplace and the focus returned to the underlying investment offerings of these firms.

At about the same time, a new branch on the TAMP family tree began to grow. This branch included firms like Oberon, MyVest and RunMoney.com. They cut the financial advisor out of the equation and took the TAMP investment offering directly to consumers through the internet. These firms relied entirely on online interactions to make the sale and service the clients. These pioneers were truly the first wave of what we now call robo-advisors. The world wasn’t ready for an internet-based, direct-to-consumer investment offering, so these firms were gobbled up by other firms that desired their innovative technology or they simply died.

Ten years later came the next wave of direct-to-consumer robos. This group, which included Wealthfront and Betterment, used the internet and slick technology to offer managed portfolios directly to consumers. They looked like the second coming of Oberon, MyVest and RunMoney, but both their technology and their timing were better. The idea of buying services through the Internet had moved light-years beyond where it was in the Oberon days.

The new wave of robos have drawn incredible attention, both for their advanced technology and their impact on the pricing of investment management services. They have also stirred a debate about whether the direct-to-consumer model is any more viable now than it was 10 years ago when it was first introduced.

Although Wealthfront is sticking to its original business model, Betterment appears to be wisely hedging its bet. It now offers both a 401(k) offering and an advisor-focused offering that is indistinguishable from a traditional TAMP offering.

In its first iteration, advisors were given access to Betterment’s technology platform, but the investment options were limited to Betterment-managed portfolios that use a small universe of Vanguard ETFs. This offering looks like an old-style TAMP offering packaged in way cooler technology. Recognizing the limitations of this model, Betterment has now added ETF portfolios from Goldman Sachs and Vanguard, casting itself more as a TAMP supermarket.

In an interesting melding of traditional TAMP and new wave robo-business models, Bill Harris built Personal Capital. The Personal Capital model uses robo-technology to offer managed portfolios directly to consumers, but also incorporates an in-house group of financial advisors to interact with prospects and serve them once they become clients. The traditional TAMP model offered outsourced portfolio management services to clients through unaffiliated financial advisors. Harris, learning from his earlier experience as the founder of MyVest, knew the value of human advisors, so he developed his own in-house crew.

The Personal Capital hybrid model has been replicated by Schwab and Vanguard, now two of the largest and most successful robo programs. This combination of online technology and human advice seems to appeal to a wide range of investors. But like all TAMP offerings, the technology is the packaging, not the product. Portfolios are the deliverable.

Same As It Ever Was
The TAMP business model and the technology that supports it have evolved substantially since the floppy disk days of the late 1980s and early 1990s. But the underlying concepts have not changed much at all. The goal is still to provide professional portfolio management services to clients, whether through advisors or an online, direct-to-consumer model. Technology is merely a means to that end and may also provide a temporary competitive advantage.

Historically, the advent of new technologies has caused the industry to temporarily lose sight of this central truth. But once each new technology has been absorbed into the mainstream, the focus returns to the underlying fact: The goal is to produce the best investment results possible for clients. The client experience that accompanies those results is important, but it’s not a substitute for solid long-term investment performance. The robos ultimately will be judged on this basis just as their cousins on the TAMP family tree always have been.