You Might be a Robo-Advisor If…

by John H. Robinson, 6/19/17

In a nod to comedian Jeff Foxworthy’s signature “You might be a redneck” shtick, the following parody offers real-life examples of why, contrary to popular perception, talented, experienced financial advisors have absolutely nothing to fear from the invading robot army:

You might be a robo-advisor if …

You boast of your platform’s use of sophisticated artificial intelligence (AI) to produce customized guidance, but send your customers emails that read, “Dear XYZ Revocable Trust u/a/d 1-1-2010,”

You think that you invented dividend reinvestment and are so proud of this accomplishment that you feel compelled to send a self-congratulatory email to your customers every time an ETF in your portfolio model pays a dividend

Your woefully inexperienced human support staff routinely gives dangerously bad advice regarding IRA and qualified plan rules

Your platform boasts of its ability to process incoming asset transfers at lightning speed, but takes weeks to process outgoing transfers and exhibits a pattern of losing and/or not processing signed ACAT documents

You preach the gospel of passive index investing, but trade your AI brains out actively managing an underlying portfolio of Index ETFs

You promote your ability to produce alpha through tax-managed trading to a client with an IRA

You are scathing in your criticism of a competitor’s “smart-beta” ETFs and preach to all who will listen that “smart beta is stupid”…only to roll out your own smart-beta strategy less than a year later.

You panic and freeze client accounts due to “extraordinary volatility” on a day when the market drops just 3%

You think it is okay to prevent clients from liquidating their accounts by hiding behind a clause on page 38 of your book-length disclosure document

You don’t get that preventing an account holder from liquidating to “protect their interests” may also be a euphemism for avoiding the uncomfortable possibility of having to report net outflows to venture capital (VC) investors (Conflict of interest anyone?)

You boast of having ultra-low fees, but fail to acknowledge that investors can purchase the exact same ETFs and/or index funds in your portfolio models without having to pay any additional fee

You proclaim how AI may one day replace the financial advisor, but then have to scramble to build a hybrid advice model because investors are flocking to platforms that offer real, live planning advice

You announce that you have a bunch of $10,000,000 accounts who have bought into your new 0.5% hybrid advice model without realizing that you are shouting to the world that you are now charging those clients $50,000+ (!) per year in AUM fees

You suckered a bunch of big name VCs into pouring hundreds of millions of dollars into your hip algorithmic trading platform with a slick user experience that has 0% chance of ever achieving the scale necessary to be profitable based on your original 15-25 basis point platform pricing

You are trying a little too hard to convince the world that your automated trading platform really is succeeding beyond your wildest expectations while you are squirming over decelerating growth rates and burning through cash like it was doused in gasoline

This parody was written in part because I am growing weary of financial journalists’ and industry thought leaders’ forecasts of doom and gloom for the planning industry at the automated hands of the advancing robo army. What has been lost in the discussion of the rise of automated trading platforms is that the enormous success of Vanguard’s late-to-market robo-model is attributable not to the sophistication of its trading algorithm, but rather to the fact that it paired its portfolio models to advice from real, live CFPs for just 30 basis points per year. In other words, the success of this model validated the fact that consumers will pay for access to a planning professional. The fact that Betterment and Schwab then scrambled to roll out their own hybrid models further validated this idea.

Those of us in the financial advice profession should thank the robo-advisors for proving our worth and for setting a clearly defined minimum value standard for advice against which to compare and compete.

We should also thank them for setting the bar so low.

Simply put, a knowledgeable, experienced planner competing against a hybrid platform should have absolutely no trouble demonstrating how the advanced expertise and custom service he or she provides goes far beyond (and is worth more) than what the client will receive from the telephone rep CFP at the robo-shop’s call center. Far from viewing the robo-advisors as predators, sophisticated financial advisors, particularly those operating under flat fee and/or tiered AUM compensation structures, would do well to start viewing them as easy prey.

For more on this subject, see the following article links:

The Tax Harvesting Mirage (Advisor Perspectives)

The B2C Robo-Advisor Movement Is Dying, But Its #FinTech Legacy Will Live On! (Kitces/Nerd’s Eye View)

Betterment Pivots Toward a Human-Robo Hybrid (WealthManagement.com)

Humans Are Coming for the Robots' Jobs at Betterment (Bloomberg)

Betterment boosts its competitiveness by going hybrid (Business Insider)

Charles Schwab launches hybrid human-robo financial advice (CNBC.com)

Wealthfront Pivots To Embrace Smart Beta (WealthManagement.com)

John H. Robinson is Founder/Owner of Financial Planning Hawaii and Co-founder and CEO of software maker Nest Egg Guru. He has co-authored three award winning papers on retirement income sustainability, and numerous papers he has written on a range of financial planning topics have been published in peer-reviewed journals.

You Might be a Robo-Advisor If…

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