The hottest topic in the financial advisory world right now has to do with what are called “robo-advisors”

This month I’d like to address the “threat” of robo-advisors and also state why I think they are ultimately beneficial for our industry.

Broadly speaking, “robo-advisor”, is a term used to describe a virtual advisor who automatically invests one’s money into a pre-determined portfolio. This solution has a lot of appeal for investors with small account balances, usually less than $50,000, who never felt they could afford real financial advice. Many financial advisors are concerned about the impact of robo-advisors because they can charge less than what an actual human advisor charges for the same or at least similar investment management.

Friendly looking robot representing robo-advisors in the financial industry

Like any industry, technology can be a disrupting force from the status quo

Many professionals call themselves financial advisors but really spend 100% of their time picking investments for their clients. There is nothing wrong with that of course, but they should be called investment managers and not financial advisors. To be sure, a financial advisor helps clients with their investments. They also help their clients with their tax planning, their estate planning, their college education planning, their risk management planning, and a host of other things.

Robo-advisors are a direct threat only to investment advisors masquerading as financial advisors

Why? Because robo-advisors can do the same thing, only cheaper. What robo-advisors cannot do is offer what real financial planners can do. Why not you ask? Because tax planning, estate tax planning, college education planning, risk management planning, and business succession planning are all highly customized and require a breadth and depth of both knowledge and experience that computers still don’t have. Not to mention the fact that robo-advisors are generally funded by venture capital firms who tend to invest in things that are scalable and can grow quickly. This is the antithesis of a highly customized deliverable such as financial planning.

The fact that robo-advisors have had such quick success has less to do with their offering

Most people don’t understand asset allocation, whether hand-picked or computer-driven. Robo-advisor success has had much more to do with the failure of our industry to serve middle-class Americans. Studies have shown that among the top reasons a person does not engage a financial planner/financial advisor – they don’t think they qualify or have enough assets to work with a professional. Imagine any other profession where people chose not to get expert advice because they’ve self-screened themselves out. Robo-advisors have taken this issue head-on by stating upfront that their minimums to open an account are extremely low.

The sad truth is that many will confuse investment management with financial advice and assume that their robo-advisor is delivering the exact same thing as what a financial planner would provide. This is the bad news about the advent of the robo’s. The good news is that others will see hiring a robo-advisor as the first step in a multi-step process and will graduate from a robo-advisor to a real-life person as their knowledge, net worth, and comfort levels improve. The reality is most Americans are not saving nearly enough for their retirement and that should be the #1 concern of our industry.

The good news is that others will see hiring a robo-advisor as the first step in a multi-step process and will graduate from a robo-advisor to a real-life person as their knowledge, net worth, and comfort levels improve

If you are contemplating hiring a robo-advisor and want to compare them with a real-life financial planner, let us know. We are always happy to offer a free-consultation to see if we can help.

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