Robo-advisors are not voiceless if their actions speak louder than words
25 August 2015
Are the automated investment advisors on their heels? Wealthfront CEO Adam Nash has been out in front of the recent market correction, highlighting the value of his firm’s approach while putting the downswing in context. The heads of other automated advisory firms are weighing in as well. Perhaps more important than what these leaders are saying, however, is the fact they are speaking at all. One might say that these firm honchos must speak up, since their robot-advisors (or more precisely, their algorithms) can’t talk to clients themselves. That was a point made by Investment News
and other media outlets describing investors’ jitters at the market upheavals. Fair enough. But to say that client communication is the Achilles heel of the automated investment advisor misses the point, in my view. Indeed, it speaks to a advisory business model that is about to go the way of the Minotaur. Here's why:
- The savvy market participant takes the long term view. Remember, 84-year old Warren Buffett is putting money into investments that (for actuarial reasons) he’ll never see again. Clients need to ask themselves if they are investors or traders.
- Do clients who are investors need the counsel of salesmen, which many advisors still are? Too many advisors simply respond to market developments and lack an actionable take on the future. Where’s the value in that?
- In most cases, the advisor will counsel patience in the face of the storm, which does indeed make sense. But is that counsel really worth a 1% annual fee, given point #2 above?
In his writings, the satirist H.L. Mencken liked to highlight the readiness of the average consumer to settle, i.e. to accept a subpar product. This state of affairs has defined the retail wealth management business to date, as advisors have had clients over a barrel. But as clients today have more choice, advisors do too. Whether real life or virtual, advisors must market their services to a new generation of clients, one that is digitally functional, demands transparency and value, and invests for the long haul. These clients treasure action over words. They are not necessarily defined by age, but they are the future of the industry. The rest are hardly worth the while. That’s my response to the investor hand-wringing that’s taken place regarding the recent market correction, and the parallel claims that the robo advisors are about to get their comeuppance.