As the financial services industry slowly but steadily becomes more tech-savvy and technology-enabled, including the adoption of online models for the delivery and implementation of financial advice, the line of where human financial advice ends and "robo" automation begins is becoming increasingly blurry. So what's the difference between a "robo-advisor" providing online financial advice, and any number of human advisors who do the same thing using online meeting and collaboration tools like Skype, GoToMeeting and web-based financial planning software?
Given that both humans and robo-advisors can deliver advice in an online medium, the key distinction is not actually about being online at all, but about how the industry itself is crafted and delivered: in the end, does the advice clients get come from a human or a (human-designed) computer algorithm?
The difference matters not only in terms of the advice itself, but also the underlying cost structure; as the robo-advisors themselves advertised in their early days, a key reason for their ability to deliver low-cost solutions to consumers was their elimination of "expensive" human financial advisors.
In the end, it remains to be seen whether or what forms of financial advice consumers will prefer to receive from an algorithm versus another human being (especially given some of the potential cost differences between the two). What's becoming clear from the attempts of both in the online world is that building trust online to get clients in the first place is difficult in a low-trust industry like financial services; simply put, online financial advice is not an "if you build it, they will come" kind of business.
Nonetheless, some of the lines about where each can excel are now being drawn, as robo-advisors increasingly focus on narrow, specific problems that can be addressed with technology and an algorithm alone—commoditizing those solutions in the process. Meanwhile, human advisors are increasingly driven to financial planning as the "anti-commoditizer" by providing a more comprehensive financial advice solution that delves into the complex realities that consumers face when viewing their overall financial picture.
Human Advisors Delivering Online Financial Advice
With the ongoing rise of the Internet and our transition into the digital age, going "online" is increasingly a medium for conducting business. Over the past 10-15 years, it's been about buying products online, and increasingly it's about buying services online as well, including financial advice.
In fact, as one recent industry study just showed, advisors are already beginning to meet with their clients less often face-to-face, using online content and even online "virtual" meeting tools (e.g., Skype and GoToMeeting).
Notably, the technology-supported delivery of financial advice in an online medium really just represents a transition to a different means of communicating, interacting and implementing that advice with a client. In other words, it's not about the replacement of the human being in the advice process, but about the replacement of delivering that advice in a face-to-face meeting.
More accurately, we're witnessing the replacement of delivering that advice in an in-person meeting, as the reality is that the availability of video meetings means online interactions really are "face-to-face." They just don't end with a physical handshake at the end!
From the human advisor's perspective, the potential for delivery of financial advice in an online medium breaks the historical link between the geography of the advisor and the geography of the client. In other words, finding a financial advisor, and running an advisory firm, becomes location-independent of the client. In turn, this creates a potential to simultaneously target a more focused clientele (i.e., a niche), yet have a wider pool of potential clients (i.e., being able to work with anyone, anywhere, regardless of geographic location). These possibilities are beginning to change the way that advisors grow and market their firms in the digital age.
Yet at the same time, the potential for the delivery of financial advice in an online medium using technology has created another possibility as well: the delivery of financial advice using the technology alone, without the human being: the robo-advisor.
Defining the Robo-Advisor
While the "robo-advisor" platforms happen to be delivered online, that characteristic is not their defining feature. As noted earlier, a growing number of human advisors are delivering their services via an online medium as well.
Instead, the quintessential feature of the "robo-advisor" is that the advice itself is algorithmically derived and delivered by a computer. While often not literally anthropomorphized into a physical "robot" (in fact, meeting face-to-face with a physical manifestation of a robot would no longer be online!), the fundamental point of the robo-advisor is that the client's advice is crafted not with the involvement of a human being to analyze the client's individual facts and circumstances, but instead by a (human-designed) algorithm designed to determine needs and recommend appropriate solutions for implementation. Perhaps a better description of the service would be "algo-advisor" rather than "robo-advisor."
The reason that non-human algorithm-constructed and online-delivered advice is so fundamental to the definition of the "robo-advisor" concerns not the advice itself, but also the potential efficiencies it seeks to achieve by removing human beings from the advice-construction-and-delivery equation.
As robo-advisor Wealthfront noted when it launched in 2011, the removal of human advisors and the delivery of advice online was a key aspect of its 0.25%-of-AUM pricing model; similarly, when Betterment changed its fees in early 2012 to the current 0.15% to 0.35% structure, it also noted that its ability to automate investing without using "flesh and blood money managers" was a key aspect of its ability to be a low-cost solution.
