Tech Driven Financial Planning?

Implications for Advisors and Investors

There’s been quite a bit of hype over the last five years, among financial advisors, investment firms, and the investing public, about what tools equally necessary and beneficial for successful advisor practices, sustainable wealth management firms, and, above all else, satisfied customers. As digital evolution continues to shape how we interact with the world, it is easy to assume tech-heavy platforms – geared toward younger generations as well as the affluent, older crowd- are key factors in continued growth within the industry.

But growth for whom?

The general consensus has been heard loud and clear – technology-based, algorithm-run “robo advisors” are the wave of the future.

More accurately, they are the wave of right now.

Sprouting up through the undeniably oversaturated wealth management space, these online financial planning sites have been gaining momentum, especially among Generations X and Y. Wealthy individuals, too, have started to direct a portion of their previously professionally managed assets to companies like WealthFront and Learnvest, albeit at a much lower clip. But it is clear, the trillion dollar industry is shifting, and fast.

The appeal? Lower fees, of course, and the ability to invest in low-cost ETF portfolios that are based on the same specific and unique information one would provide to a human financial advisor.

Time horizon on investments as well as risk tolerance and other pertinent information is all captured from the user, and complex algorithms dictate where an investor’s funds will go within the account. These programs tout returns as good as, if not better than a traditional human advisor, and fees assessed on a monthly basis are a fraction of an advisor’s average managed assets charge, resting solidly at 1.5% per year.

A number of online financial planning companies were birthed out of the demand from some investors to have more transparency on fees – and ultimately, what they were receiving in return. There was also a call for a greater relationship between the management of assets and technology through web-based platforms, even in the face of stringent regulatory compliance that has continued to lag in comparison to other consumer-facing industries. Given these demands from the marketplace, the robo advisor was born – and has grown up quicker than we could have imagined.

The use of a robo advisor sounds like a no-brainer to most, but these platforms may not be all they are cracked up to be.

Implications for the Consumer

The saying, “you get what you pay for,” could not be more accurate as it relates to the use of robo advisors for asset management. Although the same data is gathered at the beginning of the process as would be with a human advisor, there is no room for personalization. The magic algorithm that will dictate initial investment and future rebalancing, if selected (and paid for), cannot take into account the necessity for fluid planning the way a real, live human being could, nor can it provide specific recommendations on other comprehensive financial planning topics (life insurance, estate planning, tax management, etc.).

More importantly, there is an emotional connection between investors, their money, and the person, or computer, managing it. An investor may receive the benefits of lower cost and strategic, time-tested investment strategies, but there will most likely not be an option to talk it through – or have any hand-holding when the market decides to “correct.” Certainly something to consider, even when saving on fees each year.

There are a handful of robo advisor platforms that are now combining the lower-cost model with the relationship coveted by investors. Some companies are now offering, potentially for an additional fee, access to a Certified Financial Planner or registered representative who may be able to provide deeper insight into the investment selections populated by the almighty algorithm. Investors can select whether they prefer a live chat or a phone call for that extra perk.

Implications for the Advisor

The initial rollout of robo advisor platforms did not come as a surprise to the financial advisor community. The growth of such platforms, however, has noticeably shaken the industry. For decades, registered advisors were the only viable source for professional wealth management services, and those with the means happily paid those, at times, hefty management fees. Regulation over the years set in motion more clarity surrounding how much advisors were paid and for what work they were obligated to do, but still, investors were vying for an alternative.

Because robo advisors are, in theory, more convenient than financial advisors, and are a fraction of the cost each year, advisors of the human variety are somewhat concerned as to what the future holds. In the $27 trillion dollar industry, more and more accounts are being transitioned to the new wave of investing, leaving traditional advisors in a self-induced bind.

But all is not lost for these human counterparts. In fact, the influx of new technology that threatens to reduce business steadily, year after year, should promote a revamp of the stale, worn out business models of the past, potentially boosting growth and strengthening current client relationships. Advisors not only have the personal aspect that most consumers desire – especially those with a high net worth – but also have the opportunity to partner with a robo advisor to enhance his or her offerings to clients. There is a potential to gain even stronger relationships with the investing population, and create a space where the perceived enemy is now a profitable partner.

So who wins in the war between fancy algorithms and the human touch? Only time will tell who – or what – may come out on top. As for the current marketplace for investors, a combination of the two powerful forces may be the right answer, instead leaving one or the other out in the cold.

Melissa Horton, Partner, Highlander Financial Group and contributor for APRFinder.com