Clients hear a lot about different types of financial risks they are exposed to when they plan for retirement; however, when you boil it all down they really care about only one risk and that is the risk of loss.
Investors have lost 40% of their portfolio value since 2000… twice! One loss alone requires a recovery of 67% to get back to even and again this has happened twice within 20 years. So what does this have to do with Robo advisors? Perhaps some history and description is in order to begin.
The Rise of Robo Advisors
Robo advisors appeared primarily after the 2008 financial crisis but the term was coined back in 2002 following the Enron collapse and the world of intense 401k anxiety generated by this this major corporate debacle. Robo advisors are essentially technology that allow investors to access automated investment advice. The supposed benefit to investors is that if offers an affordable and convenient investment advice solution.
There are robo advisors that serve two different customer types: business to consumer (B2C) and, business to advisory business (B2B). B2C robos are directed toward the end user investor while B2B focus more on helping advisors help end-users.
B2C advisors are meant to primarily serve the “underserved” investment community, meaning the young and the end user investor, while B2B focus more on helping advisors help end users.
The B2C investment advice is produced algorithmically and there is typically little-to-no interaction with a human advisor unless additional fees are added and typically they offer no guarantee you’ll be dealing with the same person each time you use the advisor. You simply get whoever is available at the time. While the B2C segment saw initial growth, it has actually declined over the past several years. This segment continues to attract venture capital into a business model that has yet to prove profitable and doesn’t appear to be close to doing so.
This brings us back to the risk concern mentioned above. Although I believe there is a place for the robos in our industry, I do not believe, as many do, that they will replace the human touch in our industry.
One of the larger concerns about these automated advisors is they have not experienced a financial crisis or time of economic distress. The algorithms robo advisors use aren’t battle tested and there is no personal relationship to guide you through decision-making during the most critical of times.
Because there is no personal relationship, robo advisors also offer no customization of your retirement plan. Their retirement advice will not be unique to your situation not will it come from someone familiar to you and in whom you trust. You are simply part of a computer program algorithm. If you’ve never experienced the difference you simply don’t know what you don’t know and what you don’t know can and will hurt you.
The fact that the robo advisor business model has yet to be profitable raises questions as well. It’s great that they can offer a “lower cost” product in certain respects but at what expense to the investor? If your fees can’t cover your costs and you are essentially subsisting on continued venture capital, long-term you may have a failing business plan. It is estimated that it takes one of these firms gathering $16 billion in managed assets to break-even. After 10+ years there is only one that is even half-way to this amount. Time will tell how they adjust. Adjustments typically mean cost adjustment of some type to the consumer or being bought up by a competitor.
There is also the question as to how B2C robos assess risk. Some of them and their assessments given to participants are found lacking, to say the least. A professional human advisor with a good risk assessment approach who can talk with you the investor about your risk tolerance and options will do a better job of meeting your expectations over automation.
It remains to be seen as to how B2C robos serving the individual investor masses will play out over time but I do believe they can offer valuable services, especially in the context of the B2B segment. They can and do offer ways for existing advisory firms to offer services that ordinarily would not be feasible given costs and liability.
Our 401k service, which helps our clients manage their 401k while still employed, is an example of B2B advisor that helps us provide an extremely valuable service to our clients while maintaining the same risk and investment philosophies and tools that we use for our in-house non-401k assets.
Give us a call and let us show you how we can help serve you in the personalized way you deserve.