Robo-Advisors Help Investors Peek Behind the Curtain

When most people’s investment portfolios took a major hit following the 2008 subprime mortgage crisis, more than a few financial advisors wanted to send a robotic clone to tell clients their portfolios had lost value. Robo-advisors are now doing much of what financial advisors do – just not the dirty work of course.

In the new digital wealth management world, technology has empowered the individual investor, who can now choose between discount brokers, robo-advisors and/or human advisors. Robo-advisors provide automated portfolio management services – investment goals and risk screening, asset allocation and portfolio rebalancing – all with little or no human intervention.

This same technology has also caught more than one human financial advisor with his pants down as investment advisory services have become much more transparent. Wealth Managers, for example, continue to charge annual fees of around 1% even when a large portion of investments are managed through index funds instead of actively. But rather than displace financial advisors, using this same technology to streamline their own businesses has allowed some professionals to zero-in on what they do best while providing more transparent, less expensive investment advisory services for clients.

Fooling Some of the People Some of the Time

Wealth Management is a $5 trillion dollar industry and hidden investment fees are the shame of the investment advisory business, especially at old school brokerage firms. Even passive index funds may kickback a hidden 1% fee to a broker. These hidden fees reduce investment returns 1% a year or a whopping $17 billion, leading to as much as a 12% reduction in retirement income, according to a recent report on investment advice and retirement savings by the President’s Council of Economic Advisers (CEA).

Wealth management firms need to rebuild trust and relationships with the investment community. Those who have focused on client relationship building alone, however, have watched their clients jump ship for digital investment platforms. “Our research shows that firms that integrate digital tools into their business models will help strengthen these relationships rather than threaten them, and in fact help them attract the most lucrative investors,” says Owen Jelf, global managing director of Accenture’s Capital Markets practice.

Online investment services, including the robo-advisors, are forcing their human counterparts to be on top of their game. Big banks and brokerages in fear of once again becoming technology laggards (remember eTrade and the online trading revolution?) are moving quickly to add a robo-portfolio management option. At the very least, they’re adding comparable investment products and services, and of course there’s the pricing.

The advent of digital wealth managers is helping individual investors in three big ways:

Access to Professional Portfolio Services – Investors no longer have to pay high fees to obtain professional portfolio advisory services, nor do they have to compromise on quality. TradeKing – among the least expensive of the discount brokers – now provides personalized, automated portfolios on par with some high net worth wealth managers. At the same time, more wealth managers who used to snub anyone with less than $1 million in assets to invest are now lowering their minimum requirements and seeking out mass-affluents.

More Transparency – Investors can and should demand complete disclosure from financial advisors today. Since the mortgage crisis, individual investors have shown a very low tolerance for opaque financial transactions. Human advisors are under pressure to disclose as much information as robo-offerings, which are targeting/aimed at 75 million millennials who have grown up in a more transparent digital world.

Lower Fees – Robo-advisors charge fees that are often less than half of the 1% charged by typical investment advisors. A lot of independent advisors (who aren’t captive to big brokerage firms) are quietly lowering fees to compete with their digital counterparts.

Best of Both

All this new technology is exposing financial advisor practices and demanding more fee transparency. Still, it doesn’t mean robo-advisors exist to assassinate human advisors. In reality, robo-advice can complement human investment advice and save money in the process. Model portfolios cost less to construct and the savings actually helps clients to access other specialized advisory services such as tax advice, real estate investment or estate planning. Clients can have the best of both worlds using a package deal – robo-generated portfolios plus on-going highly personalized human financial guidance (at a much more affordable annual fee of .75%, as an example).

Money is Emotional, and Relationships Matter

Not all investors are ready to replace human interaction with algorithms. Money is and always has been, emotional. When someone dies, sells a business or gets divorced, turning to the robot doesn’t have much appeal. Real people want human interaction along with a personalized, customized investment plan. Not to mention a fiduciary relationship that a robot cannot offer. Individual investors are all for lower fees, but technology has limits. For example, a robo-advisor survey by the Wall Street Journal shows different robo-advisors produced different portfolios for investors with the exact same investor profiles.

More everyday investors will move toward some combination of human and online help to manage their investments and deal with serious life events that drive big financial decisions. Clearly, they will choose the investment advisors who offer full transparency. These innovations put individual investors in the driver’s seat.

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