Meanwhile, as standalone robos have matured, they have turned to humans for help. In January, Betterment began offering human advice for a higher fee. And last week, the firm turned on a messaging service in which all of its customers can reach out to real advisors for any investing or financial-planning questions, with a response in one business day.
“The digital independent start-ups are adding human advisors, and the existing advisory firms are adding software, and we’re all ending up in the middle,” says Bo Lu, who co-founded robo FutureAdvisor in 2010 and continues to run the business, which was acquired by BlackRock in 2015.
Here’s a term that ought to be consigned to the dustbin of history: robo-advisor.
There really isn’t any such thing. The two main standalone robo-advisors, Wealthfront and Betterment, are flush with human talent – behind the scenes, on the portfolio construction side and even on the client-facing side. It’s just people using software to deliver asset allocation and a little bit of planning help at a lower cost. People created the software, the strategies, the marketing, the messaging, the user interface, etc.
At the major firms that were already managing money for people – Fidelity, Schwab, Vanguard, Merrill Edge, etc – they’ve layered in automated allocation and advice software but it’s not a robo-advisor. It’s just a replacement for the traditional call center (1-800-Help-Me-Invest). And when you need to talk to a person, they have people there by phone or chat or whatever, in addition to the software.
The prefix robo implies that some machine rose up and began giving people financial advice of its own volition. It’s really stupid, that’s not actually what’s happening. Instead, firms are using a decision tree with an online user interface to tell people what to do and make trades for them. It’s not that big a deal.
In 1998, I was a summer intern at a brokerage firm. They called an all-hands meeting and the principal of the firm got up in front of fifty brokers and said the following:
“Okay guys, here’s the deal. Some of you have been asking me about email and what our policy is. I’ll make this very simple – our policy is no email.”
Literally, none of the brokers had email addresses or were permitted to send emails to any clients. It wasn’t that big of an issue, most of the rich, older clients weren’t using email anyway.
Within a year, the policies were being written so that brokers could send emails. They had to type out what they wanted to say and have the head of compliance sign off on it in advance. Then the email would be sent from the firm’s only email account. Two copies had to be printed out and put into manilla folders for future NASD reviews.
I’m not joking.
Sometime after that, the brokers got their own email addresses, but were told not to use them unless it was an emergency. The disclaimer had to be manually typed into the bottom of each email.
Then archiving came along and the emailing thing loosened up a bit. But everyone’s emails were burned to a disc and the discs were held in a locked safe (I swear to god this is true).
And then I was in a meeting sometime around 2000 at a different firm and basically the guy was like “Okay, we give up. Everyone else is using emails so we will too.”
The industry was dragged into the use of email as two things happened:
a) the technology advanced to allow it to be monitored
b) the form of communication became a standard amongst the industry’s customers
So if you were at a firm in 1998 or 1999 that had an advanced and progressive policy about the use of emails, and you looked around and saw that most firms didn’t, would you be calling yourself an “email-advisor”? Hey look at me, delivering email-advice!
No, of course you wouldn’t.
The term robo-advisor is every bit as silly as email-advisor. It’s just a tool that advisors are using to scale, drive down costs and make the decision process for how to help people a little more streamlined and uniform.
The entire wealth management industry is going to converge with the robo-advisory space in terms of both the degree of automation and the price. The whole thing will look a lot like what Bill Harris built five years ago at Personal Capital – lower cost investment advisory with a web-first interface and flesh-and-blood advisors behind it. This is what Fidelity and Vanguard are building, it’s what Schwab is building and it’s what Betterment, the most successful standalone, has become.
Sure, there are differences in pricing, in portfolio construction, in processing trades, etc, but basically everyone is robo-advising some segment of their customer base. Some firms are taking money out of their left pocket (mutual funds, call center advice) and moving it over into their right pocket (automated advice channel) and saying they raised X dollars in “robo” assets. And that makes a headline. It’s dumb but most reporters just write it up anyway. By this standard, we could refer to Merrill Edge, their call center for sub-$1 million accounts, as a robo-advisor. We could say Merrill Edge is the largest robo-advisor in the country with over $145 billion in assets!
But it’s not. It’s just the Merrill Lynch call center with a better web interface.
Now here’s the punchline: I use the term too. Can’t help it. In conversation it’s the only way people know what you’re talking about.
We built our own robo-advisor, Liftoff, a couple of years ago. This summer we did a major upgrade to it with brand new software from our partners Riskalyze and Orion. It looks great, works great, etc. But we’re humans running it.
There was a highly collaborative process between the humans at my firm and the humans at Riskalyze to build this thing out for the human clients of the service. Trades have to be monitored, questions have to be answered, etc. Michael Batnick custom-designed the portfolios. We’ve been sharing an office for three years, I can assure you he’s not a robot. Patrick Haley, my CTO, is involved in every detail to make sure it’s running right. Erika Mauro on our operations team has to fix NIGO (Not In Good Order) situations all the time with our custodian TD Ameritrade Institutional. Patrick and Erika are not robots, they are experts in trading, operations and admin managing a software product for a segment of our clientele.
The human touch required to run a robo-advisory platform effectively is just about the same as the human touch needed in every aspect of the wealth business. Any software provider who tells you otherwise is lying.
Anyway, Barron’s made the robo-advisor thing their cover story this weekend and without explicitly saying what I’m saying here, they’re basically saying it anyway – going into detail about how all the human advisors are adding software and all the software advisors are hiring humans. Convergence.
We don’t need the “robo” prefix anymore. But we’re probably stuck with it. People are still saying e-commerce, even though there are millions of consumers who were born into a world where shopping at a store online is just a given. Every retailer is also an e-tailer or they’re no longer in business. Some traditional retailers are better at it than others, but they all have e-commerce initiatives.
The same will be said of robo-advice. Some firms will attract assets online and get better at delivering there. Most won’t. But all will be doing something. Maybe then the term can die, as the distinction becomes irrelevant and the tools become ubiquitous.