Robo-advisors are automated programs providing online wealth management recommendations—absent the assistance of actual wealth managers. These innovative programs rely upon established investment advisory convention to build algorithmic outputs that promise wider application at far lower cost than current investment advisory fees. According to Deloitte Consulting, robo-advisory, while largely confined to the younger, typically less affluent Gen X and Y cohorts, had increased by 65 percent to $20 billion in assets managed as of year-end 2014. Deloitte predicts this model will reach $5 to $7 trillion in assets over the next decade!

 “Hybrid” advisory combines the robo algorithmic outputs with an actual investment advisor’s planning input—but at a higher fee. We liken this model to mass customization (mass production of planning services with some flexibility or personal touch). This concept is not new in the asset management space where client customization has purposely been avoided with products like mutual funds. However, in the investment advisory space, where customization should be the norm, robo advisory and even the hybrid robo variety should be considered fundamentally different approaches.

Because most advisors are compensated by fees based on assets under management, successful advisors have focused their businesses on the more affluent high-net-worth (HNW) clients—those with $1 million or more in portfolio assets. HNW investors have complex, often unique tax, estate and financial planning needs and these require knowledgeable professionals and quality advice that may not be necessary with the less affluent.

Technology And Disruption

While investment advisory has been criticized as an industry rife with self-interest, excessive cost and a lack of differentiation, the prospect of the industry being “uberized” by clever software engineers is chilling. That every segment of the service sector is at similar risk is hard to argue; but on-demand investment advisory? And you can be sure that the more affluent boomer generation will be targeted as enhancements to existing robo programs evolve.   

The 100 basis point question is…will acceptance of robo models fundamentally change or disrupt the investment advisory industry? We believe that the threat is real and over time the industry will see change—especially for those with simpler needs. However, there is a solution. To avoid the probable disruption associated with wider acceptance of algorithmic advisory programs, professional advisors should embrace the individuality that makes each client’s plan unique. This higher level of customization will provide a more in-depth and tailored solution that offers greater value. 

Though well-designed and marketed, robo-advisory algorithms are currently limited in the number, depth and complexity of the queries used to generate the output. Further, these solutions are largely focused upon developing on-demand asset allocation with a few well-diversified investments (typically ETFs). And while the hybrid robo model provides some access to financial professionals, these solutions are not designed to offer individualized asset location management planning, tax-aware best practices, retirement transition planning or estate planning. Equally important, it is not clear that robo on-demand advice is iterative or able to reflect the changing objectives and constraints common among transitioning retirees.

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