Will Robo-Advisors Really Takeover the Industry?
I don’t think so, and here’s why not.
History Teaches us about the evolution of industries: If we study the historical record of human innovation and the evolution of different industries, it teaches us about some, but not all, of the things we can expect in the future. Innovation may be disruptive, but it usually leads to advancement and prosperity.
An example of a prediction that was completely wrong is the work of Paul Ehrlich. It was so wrong that his predictions were 180 degrees opposite of the actual evolution of the food industry. In 1968, Stanford University Professor Paul R. Ehrlich released a best-selling book The Population Bomb. It warned of the mass starvation of humanity in the ‘70s and 80’s due to overpopulation.
He wrote, “The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate…”
The information in The Population Bomb and studies from the Population Crisis Committee were widely followed and led to the conclusion that human population would outlive the food supply in just a few years leading to widespread famine. But they were wrong. Governments and countries however, wasted billions of dollars attempting to avert the catastrophe that never materialized.
They failed to consider all the other factors that go into the dynamics of human expansion and development. Here are just two things they forgot to consider:
- Human Innovation – The rate of innovation in agriculture outpaced the expansion of the population. Today’s population is larger but is fed by less acres of tillable land than in 1968 because advances in farming techniques have led to higher yields per acre. There are more acres of standing timber today than there were in 1900, due to the development of forestry management techniques and practices.
- Birth Rates Slow in Developed Nations – As nations progress from emerging, to developing, to developed, families mature educationally, they set different goals and ultimately their birth rates decline. Today in mature developed economies, for example, the demographics are such that their may not be enough live births to fill the job demands of the future—the opposite outcome of Ehrlich’s conclusions. He also failed to anticipate the fall of socialism during the pivotal Reagan-Thatcher-Gorbachev era which brought dozens of countries into the emerging and developing category leading to decades of disappearing poverty and starvation.
So, when we consider the predictions of the death of the live advice industry, it does not appear that the futurists, commentators, and journalists are considering the historical pattern of innovation and development. While the automobile eradicated blacksmiths and liveries, it ultimately created more jobs and more wealth.
I believe the same is true of the financial services industry. We will see incredible innovation such as the introduction of machine learning and artificial intelligence to the investment advice service model, but if you consider all of the contributing factors, not just a few observations, we will see the industry grow, and the compensation of advisors, who evolve, will grow as well. The growth of the industry in the last three years supports this conclusion.
Unscientific Conclusions: In order to make a conclusive prediction of an expected outcome, the scientific method requires systematic observation, measurement, and experiment, and the formulation, testing, and modification of the hypothesis. Therefore, the hypothesis that robo-advisors will replace humans requires the consideration of many more factors than have been applied by pundits, journalists, and futurists. Robos rapid growth-rate is not alone a predictor of it replacing human advisors.
What factors are the doomsayers excluding from their analysis?
- Machine learning and artificial intelligence may help human advisors grow and gain efficiency rather than replace the humans. What if robo-tools help advisors reduce overhead and deliver advice more affordably, rather than replace the advisor? Retirement income assumptions and college funding needs are calculated robotically while interpretation and analysis are provided by the human advisor. The more likely prediction may be that advisor profits will grow, not shrink because technological advancement makes businesses better, increasing profits not shrinking them. Interestingly, as Betterment, a groundbreaking robo, attempts to grow, they are adding live advice, so are the custodians. In the final analysis, everyone wants to be us.
- Historically, HNW and UHNW people have preferred to pay someone to handle their investment complexities rather than play with a cloud application themselves, which is an experience that may be preferred by lower net worth people who may have more time to invest in a do-it-yourself application. This perspective may be supported by the $15,000 estimated average account balance of robo adopters. The assumption of HNW and UHNW investor’s preference to delegate investment tasks is supported by the growth of concierge service models and family offices.
- Artificial intelligence is decades away from solving complex problems that require non-mathematic conclusions and reasoning in areas involving wisdom, ethics, values, and discretion.
Here is what robo can and cannot do.
Robo can: In developing a financial plan, they may be able to assimilate multiple goals, including college savings, planning for home purchases, retirement, protection and risk management needs, estate planning and the need for health care and/ or long-term care risk protection. In proposing investment solutions, they may be able to aggregate outside assets, trade individual securities, ladder bond portfolios, evaluate low tax basis holdings, and allocate around illiquid positions. They may be able to help clients understand their portfolios by providing canned information and learning articles in the context of the financial results and market information being presented.
Additionally, there are also elements of the robo-advice experience that clients prefer over traditional models. They like the privacy found in a digital solution and the ability to learn, and to chart their own path. These features will be improved upon in future releases as the programs get “smarter”.
Robo cannot: Machine learning and artificial intelligence can provide quick and accurate solutions to mathematical problems and questions such as predicting a stream of retirement income or solving for a college funding need, but programmers are decades away from writing software that can apply wisdom, and discretion or help a family wrestling with securing the future of a special-needs child, or discussing how to balance their philanthropic and charitable inclinations with family and estate considerations. Wealth managers are needed more than ever.
If the Robos ultimately dominate the $15,000 account space, wealth managers may be happy they conceded that ground to the automatons. It may also portend the death of the broker-dealer model, where thousands of sales reps make a living selling mutual funds and variable annuities for inflated commissions along with the Series 6/7 securities sales persons that occupy that space, but in this 21st century, a century of global economic expansion, the need for the wholistic wealth managers, trusted advisors, and quality investment advice should be growing, not shrinking.
Conclusion – I believe the current trends will continue, and that robos will help to shape the enhanced advice model that wealth managers employ in the future. Competent wealth managers in the future will leverage AI, machine learning and their related technology advances to provide clients with more comprehensive planning and investment management services. Forward looking advisors will seek to incorporate these technologies in the same way evolving practitioners used the first investment analytic and financial planning applications in the early 1990s.
The industry is evolving quickly, reinventing itself every year. Those that do not change and adapt will be left behind. Emerging and growing advisors and firms will need to remain relevant and contemporary, partnering with firms like Dynamic Wealth Advisors to provide technology, systems, scalability, and continuity so that they can focus on delivering the very best advice and management to clients, and to strategically grow their business.
About Dynamic Wealth Advisors
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