Robo-advisors ushered the industry into the modern age of web user experience, and many wealth advisors eventually partnered with these new players to leverage this expertise for their clients.JIRAROJ PRADITCHAROENKUL/iStockPhoto / Getty Images
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The wealth management industry was still recovering from the wounds of the global financial crisis when a new challenge emerged poised to threaten its very existence – robo-advisors. These new technology-based startups garnered attention by promising to render traditional financial advice obsolete. Yet, more than a decade later, it’s evident those predictions failed to come true. So, what happened?
At the time when U.S.-based first movers such as Betterment LLC and Wealthfront Inc. emerged, the prevailing belief was that the wealth management industry was witnessing the end of an era and human advisors would become a thing of the past. Like any new concept that challenges established players, robo-advisors instilled fear and attracted significant attention. They seemed to be everywhere with numerous companies launching their own versions – even here in Canada.
Fast forward more than a decade, and the reality has proven to be dramatically different. The wealth advisory industry has attracted more investors and their assets, while the robo-advisor space has experienced a mix of successes and failures.
Taking a closer look at what’s taken place, it’s clear robo-advisors got a few things right, but many things wrong.
Improving user experience and systematic investing
Let’s give credit where it’s due. Robo-advisors excelled in providing an easy-to-use interface focused on helping people track their life goals. Intuitive and simple websites were not the strong suit of most wealth management firms in the past, but now they have become critical in empowering investors.
Robo-advisors ushered the industry into the modern age of web user experience, and many wealth advisors eventually partnered with these new players to leverage this expertise for their clients.
Another thing robo-advisors did well, initially, was to emphasize the importance of systematic investment programs. Furthermore, they played a significant role in generating interest in investing among young people through effective digital marketing campaigns, contributing to enhanced financial literacy.
So, what did they get wrong? First, they underestimated the emotional aspect of money. While they could rebalance exchange-traded funds and allow users to input life goals online, they overlooked one fundamental truth about wealth. Investing is not merely about constructing a model portfolio, but rather about understanding how individuals behave with their money.
Underestimating the value of human connection
To comprehend human behaviour in the context of something as powerful as money, you need people with experience in the subject. It’s as simple as that.
Another aspect they underestimated was the importance of supporting families during significant life events. When facing situations such as divorce, the death of a loved one, or succession planning, nobody wants to rely solely on a toll-free customer service number or a website’s Q&A section.
The pandemic revealed that many of these important conversations can be conducted remotely, but they still require an advisor who knows the family dynamics and understands the clients intimately – a level of trust that can only be built over years or decades of collaboration.
Finally, as time passed and robo-advisor firms realized they were no longer an existential threat to the traditional wealth management business, many shifted their strategy to compete with direct brokerage firms. That was a wise move as they already possessed a robust web interface, and the realm of direct trading didn’t require extensive wealth management support.
Some fared well in this space, while others faltered, particularly when they attempted to promote day-trading of cryptocurrencies and employed flashy gimmicks, such as confetti on the screen with investors’ every stock purchase. Such practices rarely end well in the world of investing.
Combining technology with the human touch
The moral of the story? A decade after their launch, many wealth advisors in Canada don’t view robo-advisors as direct competition even though these players’ original marketing campaigns painted a doomsday scenario for human advisors.
Ironically, if we take a step back, we notice the robo-advisor platforms that still exist today are either incorporating human advisors to provide more meaningful advice or partnering with traditional wealth management businesses.
That trend demonstrates that blending technology and human expertise yields superior results for investors. It’s something to keep in mind as artificial intelligence matures and threatens traditional advisors, just as robo-advisors did all those years ago.
Jonathan Durocher is president of National Bank Financial Wealth Management in Montreal.
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