In the nearly two decades since their debut, online investment advisory services have enjoyed modest success in convincing some investors to use them. Now they’ve got a sexy new name—“robo advisors”—and with it perhaps an improved chance of winning customers.
Much has changed since industry pioneers like mPower and Financial Engines starting providing online investment advice to retirement plan participants in the late 1990s. Practically an entire generation of millennials has grown up accustomed to getting information and conducting business via the Web. Now there are hundreds of automated advisory services offering to build and manage investment portfolios for them, often with no direct human intervention, for a fraction of the standard 1 percent of assets under management charged by most fee-based investment advisors.
“Most people still want human interaction, but there are absolutely people who have become so used to interacting through technology that we have to think about what it means for advice, not just in the next two years but in the next 10 years,” says Sean Cuniff, investment management research leader for the Deloitte Center for Financial Services.
Speaking at the SVIA’s 2015 Fall Forum, Cuniff argued that while robo advisors may not have the impact their creators anticipate, they will probably have a larger impact than a lot of senior executives in the wealth management industry are expecting—although a lot of big wealth management firms are creating or refining robo advisors of their own.
Among other things, Cuniff said robo advisors may prove useful in helping financial services firms deal with the new fiduciary rules expected from the Department of Labor next year. As currently proposed, those rules would extend to broker-dealers a fiduciary duty to always act in the best interest of their clients, whether providing them with investment advice or selling them a product. Where conflicts of interest exist, the new rules would require financial services firms to rigorously disclose them.
One reason the DOL has proposed the new rules, Cuniff said, is a sense in government circles that the retirement services industry hasn’t done enough to make sure that all Americans—not just those with sufficient money to hire a financial advisor—are financially prepared for retirement. One of the key advantages of delivering investment advice and portfolio management via a robo advisor, of course, is that it can be done far more cheaply than it can through a one-on-one relationship with a human advisor. Accordingly, robo advisors could help the financial services industry do a better job of reaching those who can’t afford to work with a live advisor.
Financial services firms that aren’t putting some thought and money into robo advisors, Cuniff concluded, “are probably going to miss the boat.”
