top of page

Beyond the Numbers    Financial Advisor eNewsletter


In perhaps the most famous battle between man and machine, John Henry challenged the steam-powered hammer in a race to build the Chesapeake and Ohio Railway's Big Bend Tunnel. Today, human financial advisors are facing fierce competition from a new breed of machine adversaries: robo-advisors. However, in the financial advice industry, convergence rather than competition may win the day.


Robo-advisors first emerged in 2008. Offering automated portfolio planning, asset allocation, and account re-balancing, robo-advisors quickly gained traction among early adopter investors drawn to the low balance requirements, ease-of-use, and fees which are a mere fraction of what their human counterparts demand. In the third quarter of 2016, assets under robo-advisor control totaled about $70 billion. This number is expected to surge to $489 billion by 2020, according to estimates by Cerulli Associates.


Some view robo-advisory as the natural next step in the evolution of financial advice, as online and computerized mechanisms increasingly replace human tasks. In the old days, simple stock trades were made through phone calls or even in-person meetings with human stock brokers. Online trading platforms which took root in the 1990s have largely usurped this role. Since then, industry innovations, from online financial calculators to digital advice, have moved a growing number of functions from human to machine. Robo-advice, however, represents an evolutionary leap. By taking on the more sophisticated functions of investment management, robo-advice is beginning to challenge advisors on their home turf.


Robo-advice was pioneered by pure-play startups such as Wealthfront and Betterment. But the big wirehouses were quick to enter the fray. Their motivation has been both defense and offense. The wirehouses were certainly concerned that the rapidly growing robo-advice startups posed a threat to their current client base, but they also saw the potential to extend market share beyond higher net worth clients into the mass affluent. And, by leveraging their existing client base, companies like Vanguard and Charles Schwab quickly became the largest players in robo-advisory. While some, like Schwab and Merrill Lynch, built their robo-advice business in-house, others, like Blackrock (which purchased FutureAdvisor in 2015), acquired it. More acquisitions are no doubt in the offing as others play catch-up.


The robo-advice market, however, largely remains in the domain of the younger and less affluent clients. This is partly due to what robo-advisors are good at. While robo-advisors can smartly manage investment portfolios given a few simple criteria, more complex functions, such as estate planning, retirement services, tax planning, or coaching and reassuring clients during difficult market conditions, are currently beyond their capabilities.


And this is where human financial advisors still have a firm advantage over their robo-adversaries. A growing number of companies are recognizing that a complementary offering that blends human and machine in creative ways can serve more clients better. While Wealthfront is sticking to a pure robo-advice product, Vanguard, Schwab, and Betterment are all giving clients access to both human and machine to create holistic financial planning solutions.


Folklore tells us that John Henry defeated his mechanical adversary, but expired shortly thereafter due to the effort. In retrospect, he might have thought it wiser to seek out areas for collaboration instead of contention. The financial advice industry can learn well from this lesson.

This article is a publication of Life Stage Insights, a client discovery and engagement system for financial advisors.

bottom of page