Some Advice on Robo-Advisors

Robo-skeptics are getting nervous. Their jobs may soon be obsolete.

It is no longer just retail store workers who are being replaced by automatic checkouts and other fiendish inventions. Robots are getting better at what they do than assembly line workers, agricultural laborers and customer service reps. Self-driving cars appear not to be too far away, potentially replacing taxi drivers and truck drivers.

Those who think that the creative and analytic types are safe from computers taking their jobs should take another look at the threat board.

The latest scare is the robo-advisor. Only months ago, investment houses were dismissing the robo-advisorv—va program for providing automated algorithm-based portfolio managementv—vas not an “industry disruptor.”

Even though the amazing robos typically charge less than half the fees of traditional brokerages, they argued that they cannot replace the human advisor. So far, the data has borne them out. In 2014, robo-advisors accounted for management of less than $20 billion in U.S. assets, when at the time total U.S. retirement assets reached $24 trillion.

The reason, some said, is that there is more to managing money than the calculations of cold, hard cash. A warm heart, beating in the chest of a human advisor, is the more marketable service.

“The issue is not about automated investment management,” said Michael Kitces, a partner with Pinnacle Advisory Group. “It’s about how you get a million people to trust you with their money. The only way the robo-advisors will work is if they solve the marketing issue.”

It might not be such a convincing argument. Trust has not been the strongest selling point of the financial industry in recent years. Many investors might be relieved at not having to “trust” their money to anyone.

In any case, the flesh-and-blood advisors are beginning to be out-algorithmed.

Bloomberg this week reported that some major investors have begun trying out the robo-advisors, and the traditional brokerages have their eyes glued to the trend.

“It’s real money moving,” according to Kendra Thompson, an Accenture Plc managing director. “You’re seeing experimentation from people with much larger portfolios, where they’re taking a portion of their money and putting them in these offerings to try them out.

“Now that they’re starting to see the money move, it’s not taking very long for them to connect the dots and say, ‘Whatever I offer for a fee better be better than what they’re offering for almost nothing,’” Thompson said.

The response in some circles seems to be to integrate the robo-advisor technology into the existing structure. Thus, outfits like Morgan Stanley, Bank of America and Wells Fargo will soon have their own tools based on artificial intelligence for their employees, and self-service channels for customers.

What else can they do besides accommodate the new technology, lest they be devoured by it? As one expert put it, “If an advisor is just doing asset allocation and fund selection, their business will probably disappear a few years from now.”

If the new technology really is here to stay, then consumers will have to be protected.

Transparency is essential. Consumers have a right to know when it is a person giving advice or a robot. The robot can sort out vast quantities of market data and formulate a recommendation faster than any person; but the person will still be better equipped to understand and serve the customer and his personal portfolio better than any software.

And in an ever-shifting financial environment, where a cloudy day in Beijing could in seconds precipitate a storm on Wall Street, who can say whether the “judgment” of a robo-advisor is more reliable than a human’s?

Only time will tell whether the public will really benefit and if yes, how much. In any case, the financial companies must make sure to inform customers what they are getting, tell them the risks, and give them a choice in the matter.