The Rise of the Machines

Submitted by Scott Nelson, CFA, CFP® - Professional Issues Committee Director

Robo-advice has got everybody wondering and worrying that entire industry may soon look like something out of the cartoon, The Jetsons. All this consternation led the folks at CFP Board to hire the consulting firm, Heidrick & Struggles, to project what impact robo-advising will have on financial planners by 2021. The CFP Board made the results of that study, Future of Digital Advice, available in late 2016.

The report laid out four possible scenarios in which rapid technological advancement will impact financial planners by 2021:

Scenario #1: There is extensive consolidation in the industry and the remaining large firms handle large numbers of clients via technology. Most advisors will work for a large firm acting like a relationship manager. Because of the client load, they mainly handle common issues and route clients with complex issues to one of the firm’s specialists.

Scenario #2: The public has gone completely robo. Automated advice is offered like free smartphone apps by everybody from banks and insurance companies to credit card companies. Advisors, as we know them today, mainly work with the affluent who can afford the personal touch. Other advisors serving the less affluent fill a role more like a customer service agents helping clients understand their robo-advice reports and providing strategy tips.

Scenario #3: Robo-advising stumbles to gain wide traction due to the short-comings of relying on algorithms and heightened regulatory oversight. Human advisors adopt the new technologies as an additional tool but don’t see much of a change because people are wary of tech-only advising and still prefer establishing a relationship based on trust and face-to-face interactions.

Scenario #4: Robo-advising’s biggest market is advisors themselves. People’s lives are increasing hectic and robos help advisors to offer a one-stop solution. People are also increasingly cost conscious and firms of all sizes find it a necessity to integrate robo-advising to create economies of scale to be competitive.

In fact, all these scenarios are playing out simultaneously today. There is consolidation with big firms getting bigger and rolling out robo-advisors but there are also many smaller firms finding success with a balance of technology and personal service. Some DIYers are more than happy to get all their questions off a website but most stand-alone robo advisors are struggling because the public is still not financially literate enough (and may never be) to be comfortable with such an approach.

The common themes throughout these scenarios are that financial planners will be relying more and more on technology to automate the basic office tasks and to provide generic financial planning services. To remain competitive and achieve the necessary economies of scale to be profitable, most planners have to automate as much as possible. At the same time, planners will need to deepen their skill set to provide human-centric value adds that clients cannot get from a website.

In the end, one can view the rapid technological change as a threat but I suggest it would be better to view it as an opportunity to offload mundane tasks on the machines and focus on human-centric services that build client trust and loyalty. These human-centric skills that clients truly appreciate, are also the same services that make being an advisor so rewarding. So I say, bring on the robo-advisors, I could use a good robotic housekeeper.