Why Robo-Advisors Are A Win-Win For The Industry And For You

Matt Reiner Discusses How Robo-Advisors Have Increased The Investment Pie

Human robots in business suits
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As the rise of the robo-advisors continues, these new, low cost automated investing services are changing the landscape of personal investing.  Robo-advisors are making investing services accessible to all individuals, regardless of age or level of wealth.  I recently sat down for a Q&A session with Matt Reiner, founding partner of the digital advisor Wela, to talk about just how meaningful an impact robo-advisors are making in the investment advisory space.

  

1)  The interest in investing has risen sharply over the last few years. Why do you think that is?

The ability to access investment options has risen sharply over the past couple of years. With the emergence of robo-advisors, the ability to invest is now available in the way that we tend to live our lives. Robo-advisors have eliminated the need for individuals to have to go to the 17th floor of a high rise building to get financial advice - the way our parents and grandparents did. They can now start to invest on the go and can do so at a very low cost utilizing well designed apps and websites from their phones. Robo-advisors have increased the investment pie – allowing a new segment of the population access to low cost investing.

These new options are especially attractive to millennials.  Millennials are fully engaged with technology, and they understand it. They use technology in all aspects of their lives…to communicate with friends, stay current on news, and now they are able to leverage technology to start investing.

2)  What are robo-advisors and how have they changed the investment industry?

Robo-advisors are algorithm-based wealth management services that have been developed to efficiently buy and sell investments for individuals at a low cost. We all know about mutual funds - baskets of securities that investors tend to buy either in retirement plans at work or within investment accounts outside of work.

A mutual fund could hold hundreds of different stocks at once, and each mutual fund has a manager that determines when the appropriate time is to buy and sell each of the individual securities contained in the fund. Mutual funds try to outpace a particular benchmark like the Standard & Poors (S&P) 500. What robo-advisors have done is build technology, in essence, that replaces that fund manager. Thus, I tend to explain the concept of the robo-advisor as a digital mutual fund. Robo-advisors have been able to lower the cost of this type of investing. Where mutual funds can cost upwards of 1 or 2%, robo-advisors can cost below 0.20%.

While I think that robo-advisors have increased the available options and lowered the costs for people who want to start investing, they have yet to solve the essential problem within the investment advisory space: How do we leverage technology to deliver the expected service of financial advice? We are talking about people’s money and life savings. Investing still has a huge psychological/emotional aspect involved in it, and many people still need some sort of human interaction. I think that’s why digital advisors have emerged. They are looking to merge the technology with the human element to offer individualized advice.

3)  What part do you think the robo-advisor has played in making investments fashionable for the average citizen?

Robo-advisors have succeeded in creating great technology and making it visually and socially appealing. The ability to have your investment manager in your pocket at all times is very attractive in a constantly moving world. They have taken the traditional model of investing - buying quality, low cost investments and holding them - and made it sexy and the costs even lower. Those things work in conjunction to make investing fashionable, simple, and popular.

4)  You mentioned digital advisors in a previous answer. What is the difference between a robo-advisor and a digital advisor?

Exchange-Traded Funds (ETFs) have allowed investors a simple and low cost way to access diverse investments.

  The key to investing success hasn’t changed; buying and holding an index fund has historically proven to be very successful.  But I think that the main difference between a robo-advisor and a digital advisor is the human element. Digital advisors are leveraging technology with the advice of living, breathing advisors to more efficiently deliver financial advice.

The trouble with investing, however, remains the same year after year: Investors are human, and humans have strong emotions when it comes to money. The people that lost money in 2008 didn’t invest incorrectly; they lost money because they overreacted and bought and sold at the wrong time. If we look back over the last 90 years, the worst five year period that an investor would have experienced with a balanced portfolio (50% stocks and 50% bonds) would have resulted in a portfolio down only 8.9%. Keep in mind, this period of time includes both the Great Depression and the Great Recession. But, due to emotions, most investors can’t claim this type of sustained success.

Digital advisors provide the objective human element that is necessary to keep people from making irrational investment decisions. And, through technology, digital advisors are able to proactively provide the necessary insights and viewpoints for individuals to make good financial choices. Just like with a robo-advisor, investors are able to access digital advisors on their own time, wherever and whenever they want. Technology simply makes it more efficient and effective to deliver the necessary information, and provides individuals with personalized advice.

5)  What do wealthy people tend to know about money and investing that the average person doesn’t?

Wealthy investors tend to have more emotional fortitude when things get rough in the marketplace. Warren Buffett made a lot of money by buying companies and holding them for an extremely long time. Of course, it’s very simple for me to sit back and say that, but, time and time again, it proves to be the truest key to investing success. What people tend to lose sight of is that the best time to make changes to a portfolio or investment strategy is when times are good. However, those are the times that people tend to push their investing decisions and strategies to the back burner. The best time to leave your investments alone is when things are going haywire and every headline is scary. During the bad times, the key is to sit back, wait for a recovery, and then make adjustments to your investment strategies to address what you were feeling during those tough times in the marketplace.

6)  Do you think these robo and digital advisors have leveled the playing field for the average citizen?

I don’t think it’s ever been about leveling the playing field. Instead, I think it’s about opening investment options up to everyone who wants advice. So, in essence, robo and digital advisors have simply enlarged the investment pie. Traditional advisors still have multi-million dollar clients and firm minimums, and they will continue to do so. The investors who choose robo or digital advisors are looking for something different. The mass affluent - people who thought receiving investment advice was only for the uber-wealthy - now have access to the same high-quality investment advice. Technology has allowed investment advisors the chance to manage clients and monies more efficiently than ever before, and that has lowered the cost of service for the mass affluent investor. Robo and digital advisors have brought financial and investment advice to the masses. Financial advice shouldn’t carry a ‘stuffy stigma’, and I think robo and digital advisors have finally eliminated that stigma. 

7)  The investment industry was, in its infancy, created for the uber-wealthy. Why has the industry been so slow to change?

Historically, the financial services industry has been slow to evolve. Some could say it is due to regulation and others could say that financial professionals just don’t like change. I think that one reason the industry has been slow to innovate is the financial industry has been extremely financially successful in the current model. As it happens so often, when companies get “fat and happy”, they don’t feel the need for innovation or change. But now, given the changing values and habits of the emerging generations, the industry has been forced to change in order to position for future success. Innovation has been spurred based on what our clients and prospects are demanding - affordability, simplicity, technologically innovative, and more flexibility. The only way to do that is to take a hard look at how we have been doing things and make them more efficient.

8)  The personal investment industry is based on relationships - face to face meetings and phone calls with advisors or CFPs. Do you really think, over the long term, traditional investors will embrace this technology?

I don’t think that there will be one winner or loser in this industry. Many people will still want to have a traditional advisor, and they don’t want to deal with technology. Others will want to deal solely with technology. And then still others will want a hybrid of the two. I think that over time the financial advisory space would be silly not to adopt technology in some way, because, whether they turn fully automated or form a hybrid, the advancements in technology are going to squeeze margins, and firms will have to do something to stay competitive. Future clients will likely be interested in a technology component within their financial advisor relationship.

9)  What is the profile of a typical robo or digital advisor user?

There really is no typical user. Users represent a variety of demographics – both in age and wealth. We have millennial clients that love the technology, the simplicity of viewing their entire financial picture in one place, and access to personalized advice at their fingertips. On the other end of the spectrum, we have retirees who have come to accept and embrace technology, and they love the low cost investment options and lower fee schedules than traditional advisors.

The common thread among all users of robo and digital advisors is the ability to access objective and actionable information whenever they want and wherever they are. Many users are goal- oriented, and the technology supports that philosophy of, helping users set up specific bench marks and offering strategies to achieve them. Whether users are looking to buy their first home, just had their first child, or have recently hit a milestone birthday and are focused on retirement, every user needs advice. Every user is in a stage of life where help is needed in developing a financial plan and investment strategy to successfully move forward.

10)  How can people leverage robo and digital advisors to invest their money like a Harvard-educated blue blood?

I think that the simplest answer is that they can leverage robo and digital advisors at a low cost. This, along with keeping your emotions in line, are the keys to being a successful investor. We like to say often that it is not a matter of “timing the market”, rather it is about “time in the market.” I think that the advancements in technology have allowed for almost everyone – finally - to have access to that type of investing approach. 

Matt Reiner is a CFA, CFP, and a founding partner of digital advisor Wela. As Wela's Portfolio Manager, Matt coordinates the Investment Committee and translates the decisions into trades and allocation adjustments within the Wela Models.  Connect with Matt on Twitter, Facebook, and at www.yourwela.com.  

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Disclosure:  Wes Moss is a partner at Atlanta-based digital advisory firm Wela. This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.