By the time you finished your coffee this morning you probably already read a dozen headlines about Robo Advisors. And possibly, by the time you have your second cup there could even be a dozen new robo startups. We’ve all read about how robos are going to put traditional advisors out of business; or, revolutionize the business for those same advisors (indeed, there are many camps in between). This is not another article about automated advice or about the war of words between Wealthfront and Betterment and Schwab and Vanguard and, well, anyone else for that matter. This article isn’t about questioning how automated investments will perform during a market correction, debating whether allocating a significant portion of portfolios to cash is good or bad, or examining whether automated tax loss harvesting is diametrically opposed to Buffet’s (or Graham’s) investment philosophy. It’s definitely not an article about how Millennials are reshaping the investment world.
So what is this robo advisor article about? I want to talk about the one change we know for certain robos will bring about: a better investor experience.
To date, the standard advisor-client relationship has been one of the advisor guarding all portfolio information. If the client wants portfolio analysis, their advisor emails it to them or [gasp] drops it in the mail. US Postal mail. Want to know year-to-date gains and losses? Again, clients must ask the advisor. In fact, Aite Group estimates only 55% of advisors offer content to clients through their practice websites. Even those clients fortunate enough to have online access are typically offered just a handful of static reports.
Robo advisors, on the other hand, come out of the gate with a rich client-centric experience. On-boarding is simple and fast. Risk assessment, the same. Funding an account is fast and practically seamless. Constructing a portfolio and placing trades takes less time than it took you to read this paragraph. Investors can track the basic performance of their portfolios with ease. Many robo advisors even offer rudimentary tax tools. Prefer mobile to desktop? The digital experience is equally rich (more than one robo actually offers a better mobile experience than desktop).
Here’s the thing about automated portfolio construction: it’s not really new. Models have been available for decades. Back when Millennials were still in diapers, firms like ShareBuilder, Buy & Hold and Foliofn allowed investors to create low-cost portfolio “bundles.” (Okay, so those aren’t exactly examples of modern portfolio theory in play, but the robo pieces are all there). But the robo experience? Beautiful. It’s as if you asked investors what they want their investment experience to be like. It’s the ease and elegance of these new solutions that has changed the game.
A word about Millennials. A recent trend sees sports stadiums to beefing up their Wi-Fi and cell phone reception because, you know, Millennials can’t live without their smartphones. When University of Michigan students were asked about the biggest influences in determining whether to attend a football game, the top choices were ticket prices and seat locations. The least important criteria was cell phone reception. The results were considered a surprise. Really? The relevant take-away here is that Millennials really aren’t that much different from the rest of us.
A lot has been made about robo advisors having rich user experiences because that’s what Millennials demand. But the desire for convenience and a great user experience is not the domain of the young. A few years ago, my wife and I gave my mother-in-law an iPad. Now, when traveling, she refuses to stay anywhere that doesn’t have Wi-Fi. As Guy Kawasaki would say, she just wants to be enchanted. We all do. Why should that desire not apply to finance, with enchanting investment experiences? The answer could be that many of the industry decision-makers are still perfectly satisfied with green screens.
I was recently looking for a financial advisor myself. I contacted an advisor at the local branch of a very (very) large financial services firm. Several times she sent me a link to an investment survey. Each was a broken link. Next, the advisor offered to fax it to me (remember faxes?). Finally, she found a link that worked. At the other end of this link was a PDF that I was expected to print, complete by hand, and fax back. This is not the experience I’m looking for. I never did meet that advisor.
Will automated investment advice revolutionize the investment world? That’s a subject for another post. But the new firms in the space are already having an impact on shaping client experience for investment firms. And that’s a good thing for all investors.