Can advisors ever be replaced by robots?
Over the past year we have seen an awful lot of publicity and news about the advent of the robo advisor. These robo advisors are not like the robots that can clean your house or perform surgical procedures. Today, the robo advisors are basically a computer program to help investors invest their nest eggs.
That’s not what they will ultimately become, but as of now they are basically a low-cost asset allocation program to compete against financial advisors who charge full retail rates for essentially doing the same thing.
A robo advisor is a program that delivers an asset allocation and then trades the portfolio accordingly. This is not a new tool for investors. For years there have been online programs to assess one’s tolerance for risk and then suggest a portfolio of investments to meet that level of risk.
Most robo platforms will then rebalance the portfolio as needed to maintain the level of exposure or risk to that which it is programmed to meet.
What is wrong with the words and the concept of a robo advisor is the use of the word “advisor.” There is no advisor — no human advisor, at least. And to me, the use of the term “advisor” is out of context. If it were referred to as a “robo investor” or “robo allocator,” it would be less misleading, and truer to its capabilities.
Many consumers frequently only receive advice about investments or insurance when they hire a financial advisor, and these practitioners are particularly vulnerable to new technologies that may emerge. Specifically, the advice frequently centers on the areas where an advisor can ring the register with products or fees for managing money.
This narrow behavior from advisors has many consumers thinking that an advisor is only about investments. This type of narrow, self-centered advisor should be replaced by a robot.
What a real advisor does
When I use or hear the term “advisor,” I interpret is as a fiduciary would. To me, the use of the word advisor when it comes to matters financial should include all financial issues that may impact a client’s life, family or business.
The documented process for a financial plan should include an analysis of cash flow and spending, risk management, income tax planning, investment planning, retirement planning, estate planning, family governance and basically any other financial or family business issue that the family is facing or may be expected to face in the future.
A robo can’t replace a person when it comes to discussing the prenuptial agreement that you may need for your second marriage, or the terms of a trust that will guide your heirs through the use and utilization period of their ultimate inheritance. The robo advisor also can’t help you assess the risk that you may be taking when you decide what type of homeowners or auto insurance to purchase.
It may also be difficult to have a conversation with a robo advisor about the succession plan for your business. A real person who understands the business, your customers or clients, and the talent that you’ve got available to handle the triage if you don’t wake up for breakfast tomorrow has a much greater chance of helping you make the right decisions today.
Many advisors utilize online asset-management tools or third-party services. If this is the only service that you provide for your clients from your financial services practice, you might want to consider broadening your service offering because the robo has a target on your back. And in most cases, why shouldn’t they?
I haven’t met many advisors who are truly the next coming of the best investor alive with blistering returns over a long-term, consistent basis. In fact, I’ve never met anyone like that. But what I do meet day in and day out are professionals who charge full retail prices, ranging from 75 basis points to as high as 1.75 percent for an asset-management service that is not necessarily better than an online program. Remember that your clients can buy a robo service for as low as 15 bps, with the average cost probably around 25 bps.
How long will it be before your best clients ask what you are doing for them besides managing or overseeing the management of a portfolio? How will you answer the question about your fees compared to an online service that is 75 percent lower in cost? And how will your answer hold up when the robo advisor is an offering from an established brand name in the investment world like Morningstar or Schwab?
My personal experience with clients tells me that when you are able to articulate your value over the entire spectrum of subject matters present in a comprehensive financial plan and the lives of your clients, that your services will be embraced and your fees justified. But remember, it is more than lip service. You will be expected to deliver the services that are so easily pitched.
The investment you have to make
Delivering on a comprehensive personal financial plan takes time. Pricing the planning services is a combination of art and science.
The science part can be as easy as hours multiplied by your billable rate. This method never appealed to me because it may bring on other issues.
The first issue with hourly billing is calculating and sending out the bills. You also know that a bill based on hours and rates invites the question: “It took you how long to do that?”
The second issue with hourly billing is even bigger: It sometimes develops a natural reluctance among your clients to call. If they know that the register is ringing every time they get on the phone, they may not call for issues that they really should talk to you about before acting on them.
Flat fees have some risk also. The first risk is that you may do a horrible job forecasting your investment of time. It is common to think that you can blast through a plan quickly, only to find that you actually spent 30 hours instead of the 10 to 15 you budgeted for.
A second risk may be sticker shock. A client used to paying you $1,000 for a tax preparation fee may gasp when you toss out a planning fee that is significantly higher. In my experience, it can take anywhere from 10 to 20 hours for a simple financial plan including client meetings. A complicated plan can easily stretch out over the course of a year and take more than 100 hours.
In today’s CPA firm, many skilled practitioners are able to justify their hourly or flat-rate fees for core accounting or tax services. But I believe that the future of what has been a great franchise for decades is also in jeopardy.
Yes, the Tax Code is complicated and tough to understand for CPAs, let alone your clients. But that service has a useful life only for as long as the technology takes to catch up. Bookkeeping services may work out at the low end for clients who do not have any accounting staff on site, but these services are already being successfully delivered by non-CPAs at a fraction of the cost that a traditional firm may charge.
The same could be said for the audit. I am not a blockchain expert and it’s been a while since I carried an audit bag, but it is my understanding from the insiders of the CPA profession that proper utilization of blockchain technology could render the audit as we know it much less complicated, or even unnecessary.
With all of these threats alive and growing, many CPA firms are finally looking to take their financial services division a little more seriously. Older practitioners are finding out firsthand when they try to exit.
The reality is that a small accounting practice has very little value in the marketplace. But a small accounting firm with a vibrant wealth management practice is quite marketable, and at a much higher price than a CPA-only practice.
The concept of the robo advisor will mature as the technology gets more developed, but in the meantime it is basically a substitute for picking investments on your own.
These services are not free, and just like hiring a human advisor, there is no guarantee that the cost will be worthwhile in the short or long term. As the technology improves, it is widely believed that technology will also be better at more sophisticated financial planning issues. But I believe at that level it will be able to assist professionals who understand the input and the variables, yet it will still not be able to replace a proactive and holistic human advisor.