Robo-Advisors are low cost wealth management technology services that provide automated algorithm-based portfolio advice and trading without the use of human interaction. Robo-advisors have grown quickly to $22 billion under management in a very short time and some predict that by 2020 that number could grow to $2.2 trillion. Growth has occurred mainly by targeting digital native millennials who do not have the earnings or assets to attract or warrant the attention of traditional wealth advisors.
A growing chorus of doubters (mainly wealth advisory firms that employ a bunch of humans) argue that the technology isn’t sophisticated enough to provide value to this group when, and if, they finally reach a stage where they have significant earnings and assets. This means, according to their basic argument, that while robo-advisors are a great way to serve an underserved market these same people will transfer to a traditional wealth advisor once their needs increase. In other words, robo-advisors will hand off their client to traditional wealth advisors when they have important needs.
I don’t doubt that robo-advisors will augment the work of human wealth advisors. Where I disagree with the doubters in this case is to what degree human wealth advisors will be needed/used by millennials once their earnings and assets increase in the near future. I believe the need for human interaction in the wealth advisory industry will be very low in the fairly near future.
What is missing in the analysis central to the doubters argument is how fast artificial intelligence is increasing in sophistication and capability. While I might concede that the technology of today might not meet the needs of customers with more complex needs, the technology of tomorrow will be exponentially more sophisticated and I am certain will more than meet the needs of customers facing extreme complexity.
With this in mind, I would argue that firms that are providing robo-advisory services to digital native millennials today will find that they will never require, or want, the services of a human to handle their “investments” just as there is an entire generation who feel no need to use an accountant.
For firms who provide a wide range of wealth advisory services I would view robo-advisors as central to my strategy rather than as an afterthought for those too poor or too young to afford high priced wealth managers. It is easier to get new customers comfortable with a new digital platform and ecosystem when they have never used one then it is to get happy customers to switch.