Data from The New York Times suggests that robo advisors, lacking the human touch, just might need to get some actual skin into the money management game.
Americans have become so risk-averse about discussing their investing needs with anybody, automated robo plans are left out in the cold as the fintech model seems to be failing to engage skittish American investors. That scenario suggests an opening for traditional advisors, who know firsthand where that client on-ramp is located.
Increasingly, robotics-based money management firms are edging toward more customer access to human-based advisors. Betterment, for example, is broadening its human advisory platform, opening it up to more investors. Other high-profile robo advisory platforms, like Wealthfront, is sticking to the script and keeping its menu of money services digital-only.
That strategy may not be sustainable as investors are increasingly making it clear they want a healthy dose of human-based advisory help – even on digital-based platforms.
Carla Dearing, chief executive officer at Sum180, a financial planning firm in New York City says technology has changed how Americans access investment advice. “What robo advisers, whether digital-only or digital/human, appear to be missing is that most Americans—even the population with investable assets they’d most like as customers—aren’t comfortable accessing investment advice or financial planning guidance in any form,” Dearing said.
Dearing said the trend toward the human touch may be evidenced by the fact that nearly 50 percent of Americans have zero dollars invested in the stock market, which, in turn, likely means no money invested in employer-sponsored retirement plans. “Extrapolating from there, this is also likely among the biggest drivers of inadequate retirement savings; note that 74 percent of Americans are inadequately prepared for retirement,” she said.
As long as money remains an emotional issue, engaging individuals in their personal financial wellbeing will continue to be a challenge, Dearing said. “Ultimately, reaching and financially empowering individuals at every level of the financial pyramid requires an approach that melds cutting-edge technology with a deep understanding of the principles of behavior change,” Dearing said. “We call it ‘on-ramping.’”
Dearing says this “on ramp” is necessary to improving the financial wellbeing and retirement readiness of Americans.
“Only when the on ramp is filled will advisors—whether digital, digital/human, or human—be able to impact Americans’ financial wellbeing and retirement readiness,” Dearing said.
Robo’s Stuck In Neutral?
Others agree, saying the robo-only advisory platforms have hit a roadblock of sorts, with no on-ramp in site.
“The New York Times is partially correct about robo advisors needing human help,” said Shad Besikof, president and COO of TruClarity, an investment advisory services firm located in Orange County, Calif. “The automated investment robo platforms that don’t offer human interaction and/or financial planning are not gaining the same traction as those that do.”
Besikof said he doesn’t believe American investors have become risk-adverse when discussing their investing needs with anybody.
“But I do believe they’re more reluctant to discuss their financial situations with robos that don’t have a household brand and a high level of financial security as a Vanguard, Schwab, Fidelity or a TD Ameritrade,” he said. “I also believe those firms that adapt a digital enablement strategy with a hybrid (or human touch) will come out the winners.”
A quick glance at the assets of money management firms that offer full or partial robo-advisory services demonstrates the advantages of human advisors.
According to Barrons, the top robos in terms of size are:
— Vanguard; $112 billion
— Schwab; $33 billion
— Betterment; $14.5 billion
— Wealthfront; $11 billion
“Vanguard and Schwab both offer human advisors to clients as part of its automated investing services,” said Besikof. “Vanguard provides clients a human advisor to help develop a financial plan and make adjusts such as asset allocation changes. Schwab Intelligent Advisory clients have access to a dedicated human advisor for a fee.”
Some good fortune in the form of a booming stock market may be hiding some obstacles for robo advisors.
“We haven’t had a recession is almost ten years, and for the most part, the stock market has done very well,” said Glen D. Smith, managing partner for Glen D. Smith & Associates for Raymond James, in Flower Mound, Tex. “It’s much easier for robo advisors to do well in a good economy and stock market. When the next bear market occurs, people will want to deliberate with their trusted advisor.”
Smith said it “takes years” to develop a relationship, and much of the communication as we know is non-verbal.
“When we meet with our clients, we ask about their job, health and how the family is doing,” he said. “We try to figure out what concerns they might have and how life changes could affect the current asset allocation. If I am not in regular contact with a client, I would be unaware of big life changes such as a wedding, gain or loss of income due to a job change, etc.”
Additionally, many times clients inadvertently don’t think of letting their advisor know of a financial change in their life. “But by staying in regular contact, we can anticipate their needs and better position the asset allocation for those future expenditures,” Smith said.
“While I can appreciate what the robo advisors are trying to do, I think the world needs both types of advice. As for people’s assets, I believe they will continue to gravitate towards human advisors.”
The Way Forward For Advisory Firms
The approach that every advisory firm and RIA should take is to develop a digital enablement strategy as a way to capture next generation clients, build scale and minimize internal cost associated with focusing on investing,” said Besikof. “They can add value in other ways through sophisticated retirement planning, insurance planning, social security optimization and tax strategies,” he said.
For those money management firms that are trying to market robo strategies without a human interaction to capture new clients – that’s a tough sell. “We’ve been in a 10-year plus bull market and haven’t yet seen the implications of a market correction for robos who don’t have a hybrid solution,” Besikof said.
Overall, all investment firms should employ some sort of hybrid robo model and advertise assets are held with a custodian that has the safety and security of a household name. “This is the winning strategy and one that will help them capture next generation clients and build scale relative to the more commoditized part of their business,” Besikof said.
Just being on the scene and being able to respond immediately to market events gives human advisors a leg up on their digital rivals.
Jason R. Escamilla, CEO and chief investment officer at ImpactAdvisor LLC, in San Francisco says the most recent tax changes demonstrated the edge humans have over technology in finance.
“When tax reform passed last year, days before year-end, we were able to save our clients thousands of dollars, each, with tax-smart last-minute action items,” he said. “There was no iPhone app making those calls.”
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at firstname.lastname@example.org.
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