12.06.18
Robots and Humans Paired Up Amidst Severe Market Volatility
by: Rich Blake
The emergence in recent years of lower cost, online "robo-advisors" has been something of a future shock for old-fashioned human advisors. But when the stock market went into meltdown mode back in October — with the Dow hemorrhaging 1,400 points over two harrowing days before recovering (slightly) — all that flesh, blood and experience-bred wisdom proved irreplaceable, especially when it came time to talk jittery clients off the ledge. Let's see a robo-advisor do that!
One of the largest, best-known robo-advisors did.
For the past several months, FinTech innovator Betterment, with over $10 billion under management, has been veering away from pure automation and toward a model involving traditional advisors paired up with automated asset management capabilities. It’s touted as a hybrid, best-of-both-worlds approach that appeals to clients and the next generation of advisors entering the field.
"The human factor in wealth management — encouragement during market volatility, guidance with respect to decisions, educated insights — will always be important to clients, especially as financial issues become more complex," Betterment CEO Jon Stein wrote in a blog post earlier this year.
Betterment, as well as another large robo-advisor, Wealthfront, both saw their websites crash in February 2018 during a heavy sell-off. Customers couldn't log in.
A spokesman for Betterment said at the time that the crash was a result of "particularly high volume."
No such reports have circulated in the wake of this more recent volatility spike.
By email, Danielle Shechtman, a Betterment spokeswoman, said there had not been any spike in customer activity or logins during the severe downturn on Oct. 10–11, 2018. "That tells us our customers aren't reacting to the market activity and are listening to our advice of investing for the long term," Shechtman said.
Betterment clients who log in to their accounts are met with custom alerts to let them know if they are on or off track to meet their financial goals, and what actions they should, or, more importantly, should not, take. Betterment puts out a steady stream of content on its site about the importance of not overreacting to the market. Moreover, clients can call and speak with a licensed expert if they are nervous about their investments and would like some reassurance, Shechtman said. It’s also worth noting that Betterment "Premium" members get unlimited meetings with financial planners.
"The robos have worked pretty hard to anticipate a down market and have communicated with clients over a fairly long period about the importance of staying the course," said CEO Scott MacKillop of Denver-based First Ascent Asset Management. "I think they are learning what to do and how to do it better than they did when they first started. They were tech guys jumping into the investment world, but now they have learned a lot more about investor psychology."
As of last year, automated investment platforms exceeded $200 billion in assets under management worldwide, according to one industry study.
Using algorithms to allocate and invest, companies like Betterment and Wealthfront, alongside longstanding brokerage giants, such as Charles Schwab and Morgan Stanley, have taken automation to unprecedented thresholds in financial services. The robot invasion, abetted by the rise in passive investing and ETFs, only recently seemed unstoppable, except for the fact that there's a third paradigm straddling man versus machine — man and machine working together.
In a recent report, MyPrivateBanking touted a coming wave of superior offerings that combine human and automated wealth advice.
MyPrivateBanking estimates that hybrid robo services will grow to an estimated $3.7 billion in just the next two years. It could balloon to five times that size by 2025.
Automation Expands to Prospecting
Hybrid-centric innovation is ramping up. VestmarkONE's comprehensive platform blending human and automated advice delivery, along with a similar hybrid platform, LPL Financial's Guided Wealth Portfolios, have both garnered attention over the past year.
Wealth managers who automate behind the scenes processes will be best placed to introduce client facing robo-elements, according to MyPrivateBanking.
A Betterment financial planner recently described fully embracing the hybrid role, explaining the unlikely sense of contentment to serve as mere complement to an automated platform. The 27-year-old planner told Investment News that with the Betterment digital platform taking care of client acquisition, investing infrastructure, compliance and other operations of an RIA, he was able to spend more time doing what he loves most: client service.
Wealth2k's HumanRobo, a digital platform that generates qualified referrals via a 20-minute "digital educational experience," was recently awarded the BISA 2018 Technology Innovation Award.
Boosting efficiency, advisors can lean on HumanRobo to do the "heavy lifting" of explaining retirement income, said Wealth2k CEO, David Macchia.
"In a non-threatening manner, clients learn, and they become motivated to work with an advisor," Macchia said.
"With fewer and fewer customers visiting banking centers, innovative digital communications strategies are essential," he added. "That’s why HumanRobo was developed."
More clients seem to want the best of all possible worlds. Approximately 41 percent of households prefer a mix of live professional advice and digital forms of guidance, according to a 2017 survey by the research firm Hearts and Wallets.
Even the most heavily automated providers seem to be aware that some form of human touch is needed at least now and again. Popular robo-advisor Hedgeable will provide customer service via a live chat; SigFig will provide access to a flesh-and-blood human advisor to assist customers.
Vanguard Personal Advisor Services has set itself apart by enlisting a human being to review client portfolios from time to time and offer financial planning advice. Ellevest, a robo-adviser geared toward women (and launched by Sallie Krawcheck) has a premium service that gives users access to human financial planners. Wealthsimple, meanwhile, offers all clients access to financial advisors.
"Hybrid models balance the economics of human versus digital advice and service, offering efficiency with a human touch," said Brian Dunham, principal, KPMG's Wealth and Asset Management strategy team. "Despite the success of robo-advisory FinTechs, it’s clear that robo has its limits."
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.