Will Financial Brokers be replaced by Robots?

Does it sound like a mad idea to you? Well it shouldn’t, there’s even a name for them now – Robo-advisers. The question is not if they’ll eventually have a role in the Irish market, it’s when will they have a role and to what extent will they disrupt the traditional advice models.

So for starters, what is robo-advice? It is using technology to carry out the advice process within an overall investment management proposition. It’s related to the advice part, not the management online of an investment portfolio, as that capability has of course been around for years. It’s suggested that there is a swathe of the population that may be disenchanted with the traditional advice model and want to be more in control of the process themselves, via the use of technology. It’s already making strides in other markets – for example a robo-adviser firm in the US called Wealthfront now has more than $1bn in assets after only two and a half years in operation. They’ve doubled their assets in the last 9 months.

The robo-adviser model works by the investor completing a series of questions on a website, similar to those that you ask at a meeting with a client – their investment objectives, age, time frames, assets, risk profile. The website then instantly runs a programme that produces an appropriately diversified portfolio for the investor, made up of passive funds and ETF’s. Once the portfolio is implemented, the other activities carried out by an adviser (rebalancing, annual reports etc.) are also carried out by the robo-adviser.

So are robo-advisers a real threat for financial planners and financial brokers or can they be ignored? Well the jury’s definitely out, so here are a few thoughts to help you make up your own mind.

Why you can’t ignore them

  • Cost: Websites can typically work for a lower price than humans. So robo-advice will be attractive to investors whose main aim is to reduce costs.
  • Convenience: Investors can get advice without leaving their desks, at a time completely of their own choosing.
  • Dissatisfaction with existing broker: Some investors are dissatisfied with advice they’ve got in the past. They see this as a preferred way forward.
  • Technology: The technology is (or at least appears to be) there now to enable people to get the advice they are looking for.
  • Attractive to younger investors: These models are potentially more attractive to younger investors who are happy carrying out many others aspects of their lives online. Will they view investment advice any differently?
  • Attractive to smaller investors: As financial brokers struggle to deliver their proposition profitably to investors with smaller funds, this may not pose the same problem for robo-advisers.
  • The missing link: The advice piece was the one area missing in terms of portfolio management. Robo advisers will enable investors to fully manage their portfolios online.
  • Scale: One of the biggest challenges for financial brokers is to deliver a top-class advice proposition to large numbers of clients. This is not a challenge for robo-advisers.

So is it game over for traditional financial brokers. To my mind, absolutely not! While there might be fewer arguments “for the defence” below, these are very powerful reasons.

Why financial brokers will always win

  • It’s all about the discussion: We only have to look at the risk profiling process. I think many financial brokers agree that none of the systems available are perfect, that the discussion between adviser and client is equally important to bottom-out the client’s real risk profile.
  • Tasks can be templated, but people cannot: We’re just not that straightforward as a species! Research tells us time and time again that the full personalisation of advice is a key requirement of investors.
  • When markets tumble: Who do you call for reassurance and advice when markets tumble? I call my financial broker, unless he’s got to me first! No such luxury with robo-advisers.
  • A major change in your life: Who will help you make sense of the impacts on your portfolio of major changes in your life – a death, a sudden and serious illness, loss of job etc. All of these need a friendly face to keep you on track. Robo-advisers don’t offer that.
  • It’s not all about portfolio growth: Financial brokers give so much valuable advice around the edges of a portfolio – they will consider the impact of taxes, inheritance planning and protection needs. All very valuable and not on offer from robo-advisers.
  • You can’t ignore emotions: Investing can make you feel exhilarated, angry, reassured, doubting! Financial brokers play a very important counselling role, one that robo-advisers will never play.

I for one can’t imagine being willing to pass on the value that I get from my financial broker. Yes the fees may be slightly higher than those available online, however I think they’re worth every cent in terms of the reassurance that I get, the opportunity to “run things by” him and the sense of having someone in my corner. I won’t be moving!

Do you view robo-advisers as a real threat or are they on your radar at all?