“In 30 years, a robot will likely be on the cover of Time Magazine as the best CEO … machines will do what human beings are incapable of doing. Machines will partner and cooperate with humans, rather than become mankind's biggest enemy.”
A decade ago, the rise of robo advisors was a major concern for many financial advisors. Industry analysts and media reports predicted the rapid rise of algorithmic and emotionless financial guidance, delivered for a fraction of the cost of traditional wealth management services.
In their most extreme forecasts, these predictions indicated that software would eventually replace human-provided advice, pushing human advisors out of a job.
What is a robo advisor?
A robo advisor is a digital investment platform that uses algorithms to provide automated investment management services.
Robo advisors are often viewed as a more affordable and accessible alternative to traditional financial advisors, as they typically charge lower fees and require lower minimum investment amounts.
However, it's important to note that robo advisors may not provide the personalized advice and guidance of human financial advisors, which some investors need.
Predictions about the rise of robo advisors never came to pass
The predictions of many industry analysts and media reports that robo advisors would rapidly take over didn’t happen.
As it turned out, robo advisors weren’t nearly as disruptive as first modeled. Analysts at KPMG had predicted their assets could reach $3.7 trillion by 2020, but they never came close. It took until the end of 2022 for total robo assets to cross the $1 trillion mark.
For as many splashes new robos were making following the early days of the Great Recession, there were nearly as many faceplants in the years that followed, with robos shuttering as assets and clients drying up.
4 ways human financial advisors can stay ahead of the bots
These digital-only RIAs nailed some premises: a new generation of investors was both underserved and was actively looking for a digital-first approach to their financial life. Stubborn financial advisors who refused to adapt either retired or sold their book of business.
Those who came out on top took action to improve their firms and move beyond commoditized activities like building an investment portfolio of low-cost ETFs and turned to a more automated approach. They focused on providing value-added services, emphasized financial wellness, and improved client portals.
1. Expand digital onboarding and automation for clients
Robo advisors brought the expansion of digital onboarding and increased both automation and client expectations. With no human sales force to close deals, robo advisors were forced to eliminate as many friction points as possible. Prospects were essentially onboarding themselves. Today, paper-based account openings, wet signatures, and week-long processes to open and fund an investment account are rare, if not completely obsolete.
These changes expanded access to investors who were younger, in remote areas, or reluctant to meet with an advisor in person. They also enabled advisors to reduce overhead and have more time to focus on big-picture tasks. Advisors today can benefit by continuing to automate and seek to remove friction points with clients whenever possible.
2. Emphasize holistic financial wellness to establish long-lasting client relationships
The algorithmic, automated investing process introduced by robo advisors forced traditional financial advisors to expand their services. Advisors can future-proof their services by offering clients a full spectrum of financial wellness solutions, rather than focusing solely on investment management.
Financial wellness, as a concept, includes a range of financial planning and management services that can help clients achieve their long-term financial goals and protect those accomplishments once attained.
Holistic wealth managers typically offer more than 10 different in-house advisory services, according to a 2021 report by eMoney Advisor. By serving up a more comprehensive menu of services, these advisors achieved 47% higher assets under management (AUM) growth and 67% higher client growth year over year, compared to advisors offering a more limited list of services.
Moving beyond investment management also can afford a human advisor the opportunity to use an advantage: empathy. Matt Reiner, a partner of Capital Investment Advisors, a $2.8 billion RIA in Atlanta, and CEO of the wealthtech startup Benjamin, wrote in WealthManagement.com, “Empathy has real benefits for the resilience and longevity of your practice. It’s never been easier to self-manage a portfolio or open an account with a robo advisor … [Y]ou need a differentiating factor if you want to continue growing your firm.”
3. Provide real-time information and opportunities for human interaction
Today’s client portals provide insights into spending habits, updates on goal progress, and interfaces for communicating with advisors. They’re a valuable resource for centralizing financial information while providing personal financial management tools, educational material, and financial planning resources. Account aggregation technology helps clients better understand their net worth, as well as provides advisors with more information to round out financial planning calculations and a warm lead for asset gathering.
Pre-pandemic usage of client portals by end investors was very low (25–30% of clients were using them regularly). Since the pandemic, clients' usage of digital tools has climbed, with nearly 60% of clients logging in daily or weekly.
“It’s not hard for me to envision a future in which virtually all of the mechanics of what we do as a profession can be digitally enabled,” said Randy Bullard, global director of Charles River Wealth Management, at the 2022 MarketCounsel Summit. “The amount of data we have to work with, the amount of sophistication that we can create algorithmically, to create bespoke solutions for individual investors based on that information improves every day.”
To stay ahead of robo advisors, human advisors are pushing for client portals that provide real-time information and human interactions. In the past few years, client-portal-like apps, such as eMoney Advisor’s Incentive app, have borrowed the same concepts by including a feature that allows clients to digitally interact with their advisor. As digital interactions become second nature, advisors and clients want to interact with all the richness technology has to offer.
4. Empathy can help you stay ahead of AI advice
No matter how much technology improves, wealth management is still a relationship business. The rise and plateau of robo advisors prove that adding value, whether by streamlining the client onboarding process, providing an empathetic connection across various wealth-related services, or constructing a well-designed client portal, has kept human advisors ahead of the robots.
Nevertheless, algorithmic advice has had its casualties. Beta-generating investment management has largely been commoditized—along with a generation of advisors who once earned their living through commissions and transactional engagements.
With artificial intelligence improvements, advisors will again be forced to adapt. As the financial advisory industry continues to evolve, it’s up to advisors to find new ways to meet the needs of their clients and stay ahead of the algorithmic competition.
Robo advisor vs. financial advisor
To sum it all up, while robo advisors have transformed the industry, a dedicated financial advisor can stay ahead by combining technology's benefits with an empathetic and holistic approach to wealth management.
- Level of human interaction. High-net-worth clients have different needs when it comes to human interaction. A robo advisor account enables clients to effectively onboard and manage their account independently. However, advisors can beat bots by using streamlined onboarding and client portals while adding opportunities to advise virtually or in person when desired.
- Expertise. AI-powered accounts can offer a lot of value, but they can’t replicate human empathy. Financial advisors who lean into a deeper understanding of their clients' goals and needs can offer insights that bots can’t.
- Customization. While robo advisors can help clients manage financial accounts and risk tolerance, they can’t provide the same nuanced advice that a knowledgeable advisor can provide across all assets.
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*Written in partnership with Wealth Management