Today’s blog is going to be in light of a few interesting posts I recently came across. It is going to be one of those techno-optimistic posts about the future of technology, and how it relates to insurance agents, wealth managers, financial planners, and the financial advice industry in general. I always find these sorts of posts fun because they let me take a step back from the day-to-day grind to discuss the market forces I see conspiring to build an interesting tomorrow. This allows me to spend time admiring the forest instead of just the trees. And while trees are pretty, the forest is breathtaking! Plus, I think you guys like these sorts of posts too. My post on the bright future tomorrow’s financial advisor has been one of my most read and shared blogs to date.
As such, I’d like to introduce a brand new term today. One that we have recently come up with at Finaeo. That term is the bionic advisor, and I believe that it represents the financial advisor of the future. Yeah, I know, bionic advisor sounds a little weird. A half-man, half-machine insurance agent or wealth manager. But you just need to think about it in a positive fashion instead. Instead of Terminator, think Robocop.
So what is the bionic advisor? Am I saying that you are going to become a crime fighting cyborg encased in “titanium lamented with kevlar”? Yes. Well, okay, not really, but that’d be pretty great too, right? Joking aside, I define a bionic advisor as a financial advisor who uses technology, especially artificial intelligence, to provide his or her clients with incredible service. The bionic advisor is an adamant believer in technology, allowing him or her to digitally outsource certain aspects of the job while focusing on relationships. And the bionic advisor is the future of both financial advice and financial advisors. Whether you are dealing with employee benefits, financial planning, life insurance, or managing a portfolio as an investment advisor, technology is going to automate many of today’s tasks. It will absolutely change the landscape.
And this changing landscape will provide both danger and opportunity for financial advisors today. It provides danger insofar as advisors who do not understand how new technology will change the nature of their work are in for a rude awakening. It provides opportunity insofar as the financial advisors that do get it will be able to build larger books, create stronger client relationships, and get a leg up on the competition.
Robo-Advisors and the Impending Apocalypse*
So, I want to make sure that this is not a doom and gloom article. I hate those, because I tend to be a very optimistic person (I’m an entrepreneur, I run off of optimism and coffee). In fact, I think that the future for financial advisors is going to be very positive, as long as you are willing to adapt to a shifting market. To understand my thinking, let’s discuss robo-advisors first.
In June of 2015, AT Kearney came out with a report which predicted that robo-advisors would grow their assets under management (AUM) to $2.2-trillion by 2020. This was sensational, and a recent Business Insider analysis upped the forecast, stating that robo-advisors would be managing over $8-trillion in assets by 2020 (with about $2-trillion being in sustainable investments). For wealth managers, financial planners, and investment advisors everywhere, this has been a worrisome market shift. The narrative has been clear – clients are going to leave traditional financial services in droves to use robo-advisors instead. The end of financial advisors was drawing near. Financial advisors would be the next cab drivers, displaced first by other Uber drivers, and shortly after by fleets of self-driving cars. Enter the doom and gloom.
Except that’s not what has seemingly happened. What we’re seeing in the market instead is an evolution of sorts. To better understand it, let’s first discuss the growth slowdowns of two massive client-facing robo-advisors: Wealthfront and Betterment.
*Apocalypse greatly overstated
Stalled Growth in Robo-Advisors
Recently, Michael Kitces presented an amazing blog post about the stalling growth rates of some of the bigger client-facing robo-advisors in the United States. Specifically, he looked at the Betterment and Wealthfront. In recent reports, both companies announced growth rates ranging around $100-$150-million per month. Now, this is certainly a big number, however, it was well below market expectations. Quoting Michael below:
“It’s notable that relative to their growing asset base, drawing in “just” $100M per month actually represents a drastic decline in the growth rates of the companies…
Instead, relatively flat net flows supporting an ever-growing asset denominator is causing robo-advisor growth rates to crash, with both Wealthfront and Betterment growth rates falling to just 1/3rd of their levels from a year ago.”
This is a pretty drastic collapse in growth rates. What it tells us is that they have tapped out the low-hanging fruit of their markets. As Kitces points out, whereas both companies used to focus on digital advertising, they are now spending large sums of cash on traditional advertising (e.g., billboards and commercials). This implies that they have saturated their respective markets and are trying to broach into new ones. Moreover, Kitces goes on to explain that while $100M per month seems like a large amount of growth, these companies need over $16B in AUM just to break even. And, at this current growth pace, they will only hit $10B AUM by 2020 – well below their break-even point.
So, what’s going on? Has the robo-advisor wave fizzled out? Can we get out of the bunkers, heads held high, knowing that the crisis has been averted and it’s time to get back to business as usual?
In a word: no.
The Times They Are A Changin’
I’m going to lay out a few hypotheses about why I believe direct-to-consumer robo-advisors are struggling to attain the levels of growth they expected. Afterwards, I would like to discuss what I think it all means.
Turning back to stalling growth, the first limitation that client-facing robo-advisors currently face is that they provide limited services. If a person wants to passively invest in a portfolio of ETFs, then using a robo-advisor may work. It will discover his or her risk preferences, create a portfolio, and do so at a cheaper rate than has traditionally been done by asset managers. It can also react more rapidly to market changes and automatically rebalance said portfolio with the speed that no human advisor can compete with. Now, one of the biggest issues robo-advisors currently face is that they are limited in scope. When turning to investments, if a client has particular preferences, he or she is likely out of luck. Likewise, there are no mass-market robo-advisors that are helping clients with tax planning, financial goal setting, or insurance products. As such, when you look at robo-advisors today, they are still fairly barebones. This highly limits their usefulness to the mass market.
However, this limitation is rapidly vanishing. Already, robo-advisors offering thematic investing are popping up. For example, Motif allows clients to build their portfolio in thirty seconds based around themes such as virtual reality. Earthfolio similarly allows clients to build portfolios around social impact investments. It is no stretch to imagine that the near future will have robo-advisors that allow far more investment flexibility than anything currently available. In fact, they may be able to provide the perfect portfolio for a client based on risk tolerance, preferences, values, and goals and then rebalance them regularly in the near future. Likewise, while there have been clear limitations in other financial and insurance services & planning, I have now come across a number of early stage startups trying to disrupt this space as well. They are trying to build the robo-insurance advisor and the robo-financial planner. Smart AI that can help consumers create financial plans and then purchase the right products and make the right decisions in various investment vehicles. So while limited services may be an issue today, they certainly won’t be in the near future.
And let’s not mince words. Robo-advisors are better than human advisors on a great number of tasks. A robo-advisor will be much better at balancing a portfolio regularly. It will be much better at figuring out the right insurance product to help a client’s financial plan remain on track. It will be much better at offering various financial strategies based on client preferences and rejiggering them when there are situational changes in the client’s life. This is no sleight against financial advisors today. It is simply reality – in the realm of quantitative planning, humans will no longer be better than smart algorithms. You wouldn’t go head-to-head against a calculator in multiplying large numbers – this is really no different.
So will more variety and smarter algorithms change the equation? Somewhat, but not entirely. After all, ETFs in North America reached $2.2-trillion recently, so there is clearly appetite for more simplistic investment strategies by the public. There is more to this equation besides just limited service offerings. The second reason why Wealthfront and Betterment are struggling to grow is because financial advisors do provide something that robo-advisors cannot. Financial services professionals offer their clientele peace of mind. As the PWC Sink or Swim report discussed, rapport was the second-most cited reason for why a high net worth individual decided to stay with his or her wealth manager (see my blog discussing the report here). But high net worth or not, this is common across the board. People stay with their financial planners and insurance advisors because they have built a relationship together. I have seen this in my own life and am sure you have as well.
Big financial decisions, be they insurance, planning, or investing, are frightening undertakings when someone is not experienced in the matter. The first time I invested my own dollars, I was petrified. I was sure I was going to screw something up or make some obvious beginner mistake. And I have an MBA (which, very theoretically, means I have some level of financial literacy)! I thankfully didn’t, but I ended up hiring a financial planner shortly after. She helped me sketch out my financial goals, set-up my retirement savings plan, understand how much I could spend and how much I should save, and, overall, gave me comfort. Someone was holding my hand through a complex process. I often think of her as a doctor for my finances. She guides me through financial decisions and keeps me resolved when I’m worried about the market or my financial health. I know I can always rely on her if I am concerned or uncertain about an issue.
It is this lack of human touch which I believe will always be a core limitation of robo-advisors. While there will rapidly be tasks that a computer is far more suited to do than a human being, building trust and the human element will remain strictly human. You can’t out-calculate a calculator, but you can certainly out-relationship one.
Here Come the Bionic Advisors!
This is what the bionic advisor is all about. It is the advisor who seizes the upcoming opportunity that robo-advisor technologies will provide. The traditional financial advisor? He or she tries to out-calculate a calculator (and fails). The bionic advisor? He or she uses the calculator instead and saves both time and money. This allows her to focus more time on building strong relationships and providing that human touch that clients want. Like an accountant using Excel, the bionic advisor uses robo-advisory services to help service her clients. All the while, she focuses on educating, guiding, and working closely with them.
And the early bionic advisors are already here. Take Vanguard’s Personal Services Advisor platform, which brought in $12B in AUM during its first six months of operation. This platform combines the value of a robo-advisor – lower costs, automated portfolio management based on risk tolerance – and combines it with the value of a human financial advisor. You are always a phone call or video conference away from a real human being. Likewise, WealthSimple, a prominent robo-advisor in Canada, recently announced that it was launching a platform for advisors. The purpose was to provide financial advisors with a toolset to easily manage their clients’ portfolios. Instead of having to build, monitor and rebalance these portfolios, the WealthSimple platform does it for them. This has left advisors free to focus on relationship building. On being there for their clients and working closely with them to ensure their goals are met.
This will absolutely be my last picture of a robot and human hand.
This is just a taste of the beginning. The near future will see platforms similar to WealthSimple take over the landscape. We will start to see the automation of most financial services. You will have client 360 platforms which can analyze bank statements, cash flows, and spending habits to create fully personalized financial plans based on goals, beliefs, and constraints. These platforms will provide top-notch financial plans for clients in a split second. The beauty of it is that the bionic advisor will take advantage of them. There will always be direct-to-client competitors, but as we move forward, more and more of these platforms will become available to financial advisors. They will help you build a moat around your clients. At the same time, they will reduce the quantitative busywork of your day. Instead, you will be there to help troubleshoot real issues and to build strong relationships.
Imagine having a client in 2020 named Bob. Bob is on the platform you use behind the scenes (let’s call it Finaeo, for the sake of simplicity of course). Through Finaeo, Bob has given you access to bank and credit information. He has also done a short questionnaire which has allowed the system to get a better understanding of his risk tolerance and life goals. With all of the information available, Finaeo helps generate a plan for Bob. You may need to change a detail here or there, but 95% of the heavy lifting will be done by the algorithm. Your job is to contact Bob and discuss the plan with him. You must educate him, walk him through the steps, and make sure he is satisfied. You are there to listen to his concerns and either allay them or reformulate the financial plan based on these new objections. You do so and Bob is happy.
Six months go by and all of a sudden, Finaeo notifies you that something with Bob has changed. You had chatted with him a few months prior as part of a best practice check-in, and he hadn’t mentioned anything new. However, it looks like he has started spending a lot of money at Babies “R” Us. It predicts that he is about to have a child. Because of this, it proactively creates a new plan for Bob that adds in an RESP, life insurance, and amends the amount of dollars set aside for leisure versus savings. Your job, then, is to pick up the phone and re-engage with Bob. You do so and while checking how things are, wouldn’t you know it, he tells you that his wife is five months pregnant. Well, that’s great, you say. Have you ever got the plan for him.
That is the future. Financial advisors will use the tools available to them to be able to build stronger, smarter relationships with their clients. They will better understand what’s happening in a client’s life and be able to offer better solutions at a much faster pace. But, at the core, the relationship will still be paramount. They will still be there to hold the client’s hand through complex life choices. Advisors, such as yourself, will still remain teachers and doctors of financial health.
That is the bionic advisor. And, to me, that’s pretty damn cool!
What do you think the future of insurance and financial advisors looks like? Am I way off the mark with bionic advisors, or do you think technology is going to be a net positive for the industry? Will it augment or replace the career path? Let me know and, as always, please subscribe and share this blog!