(Mark Simmons, president, Simmons Asset Management. Photography by Don Kadair)
When Mark Simmons was in college, he asked one of his teachers, a bank president, whether the growing prevalence of online banking might make jobs in banking obsolete. The answer: Absolutely not. In fact, people might even need bankers even more.
Now a financial planner and portfolio manager in Baton Rouge, Simmons recalls that conversation when asked if computerized investment services, also known as robo-advisers, are a threat to his industry. Most investors will prefer working with a human, he says.
“Money is such an emotional thing that most people have trouble trusting to a computer-generated plan,” says Simmons, president of Simmons Asset Management. “Ninety percent of my job is behavioral finance, which is managing behaviors.”
Robo-advisers such as Betterment and Wealthfront have been gaining popularity, but they remain a small sliver of the overall marketplace. A survey by consulting firm Corporate Insight found that total assets managed by the 11 leading robo-advisers in the United States rose 65% in 2014, hitting $19 billion. While significant, this figure represents less than 0.1% of the $33 trillion in retail investable assets, according to the international consulting firm Deloitte.
Simmons compares robo-advisers to tax preparation software. Such programs might work pretty well for many people a lot of the time, but they don’t catch everything, he says.
“There’s always going to be something that’s going to be missed [by robo-advisers],” he says.
Donald Andrews, dean of the College of Business at Southern University, says the growing popularity of robo-advisers could become a threat to the larger investment industry. It’s no surprise that millennials, who essentially have never known life without the Internet and are used to no-cost or low-cost services online, are drawn to the new market.
“This is an area that is prime for disruption as financial markets move more and more to automated transactions,” Andrews says, noting the continued development of artificial intelligence technology such as IBM’s Watson supercomputer.
Adam Ritt is director of communications for BetterInvesting, which recommends holding a diverse stock portfolio, investing regularly, and reinvesting earnings and dividends from stocks. He says he’s dubious about the efficacy of robo-advisers.
“Once they’ve built a history and had to operate through bear and bull markets and we can see how customers succeed or fail using these programs, we’ll have a better idea of what they can do,” Ritt says. “For now, I view any such automated program with skepticism.”
Keith Kelly, vice president of sales and new business development with American Portfolios Financial Services, says computerized, low-cost solutions might be appropriate for many clients, noting that different robos provide different services. But a robo-adviser can’t talk you out of doing something silly when the markets are volatile, and as customers reach different points in their financial life cycles, they might find they need the personal touch.
“I would need [about] seven of the current brands of robo-advisers that are in the marketplace to serve all the needs I have in my household,” he says. Even then, he says about 30% of his needs would not be addressed by the robos.
Joe Ziemer is a spokesman for Betterment, a robo-adviser launched in 2010 that says it has 150,000 customers who have invested $3.9 billion. While many of them are millennials, a little more than 30% are 50 years old or older, he says.
Many robo users are former do-it-yourself investors for whom paying an adviser isn’t a realistic option, Ziemer says. Some might rely on a service like Betterment when they’re 30 years old but might want a personal adviser when they’re 55 and their finances are more complicated. And some might use a robo as a “satellite strategy” that complements their larger portfolio, Ziemer says. Interestingly, more than 200 registered investment adviser firms use Betterment to manage client assets, often as part of a “segmentation strategy,” he says.
“I don’t think we view it as a ‘man versus machine’-type battle,” Ziemer says.
In a recent report on disruptive trends in wealth management, Deloitte says robo-advisers likely will not displace human advisers. Instead, “science-based advice may draw customers who could not previously afford a personal advisor or were not comfortable with human-based advice—potentially expanding the advice market,” the report’s authors say.
Deloitte predicts the rise of a hybrid model that allows advisers to outsource some aspects of their work and focus on other aspects where they can add more value, such as needs that go beyond investment (including tax and estate planning) or involve emotional issues (such as securing health care for elderly parents). In fact, traditional financial advisers like Vanguard and Schwab already have launched their own robo-platforms that include the option to interact with a human.
Simmons says he expects the typical Business Report reader probably wouldn’t be satisfied with a robo-adviser. But for small investors who balk at paying higher fees to a personal adviser, they might make sense.
“Our business is built on trust,” Simmons says. A computer program can’t give you that same relationship, he says, but it’s better than nothing.