The following is a guest post from Chris Ambridge, president of wealth management firm Transcend Private Client.
For many people in the personal financial sector the growth (or should I say explosion) of robo-advisors has been unnerving. The tried and true methods used by traditional financial advisors are being challenged by people who say technology can meet all investment requirements at a lower cost.
As a society, we have grown to rely on computers, so why should they be excluded from investing? Robo-advisors claim a computer algorithm offers an effective way to make money. The attraction of taking the “guess work” out of investing has been very persuasive for millennials. New companies have been sprouting up throughout Canada and business, with just a few clicks, has been booming.
But the key market has been tougher. So far, baby boomers, the people with money, have been reluctant to do more than dip their toes into the world of digital wealth management. So what needs to change?
Here are five issues that need to be resolved:
Personal Touch Whoever thought up the term “robo-advisor” failed to understand there is a very personal aspect to money. Most of us don’t want to waste it and we also want to be responsible for how it is spent. Therefore, during periods of market uncertainty we want to be able to speak to someone who understands our personal situation, who is at the end of the line when we call.
For baby boomers, robo-advisors need to prove they can cope with individual concerns and are not committed to a one size fits all response. Older clients come to investing with experience of the roller coaster effects of market uncertainty. In many cases, all they are after is a trusted voice to explain the best course of action for their particular circumstances.
Asset Allocation Baby boomers need to have confidence their investments are being managed based on their goals and the level of risk they are willing to tolerate. The personalization of an investment plan matters to this group. Robo-advisors need to find ways to explain to baby boomers that lower fees are not compromising flexibility. Many financial advisors believe asset allocation is one of the most important decisions an investor makes – there is no simple formula that takes into account if a person is a parent, a spouse, a retiree etc. Successful robo-advisors will be those that can illustrate the ability to fine-tune an investment.
Experience No matter how many questions you answer on a prepared questionnaire it will never have the same understanding about you as when you spend time talking with a financial advisor. This allows you, the investor, the opportunity to discover if the financial advisor is right for you. Not all investments fit a cookie-cutter model, not all financial advisors are the same. Robo-advisors need to show they are not trying to shoehorn a person’s unique financial situation into a fixed model. Over the coming years, robo-advisors will have to display how they can offer a personalised service to potential customers.
Brand Reputation Being seen as cheap and cheerful has allowed robo-advisors to grow and all the indicators suggest the boom is not slowing down. But baby boomers are going to want more substance surrounding their investment decisions. Anecdotally, some investors are having second thoughts because they are not able to see and compare performance results. Robo-advisors must look beyond the mantra “we are cheaper” as a way to attract older clients.
Fiduciary Standards Robo-advisors do have to adhere to the strict regulations governing personal finance investments in this country. This could be very challenging for firms who have developed a model servicing thousands of clients with only a handful of employees who are properly registered. In theory, if every investor is exactly the same the issues should be manageable. But life, and people, are complicated. The needs of individual baby boomers have no relation to the many millennials who have been the engine for past growth in this sector.
Savvy investors will need to be persuaded that the lower costs advertised by robo-advisors come with structured and prioritized investment know-how. Baby boomers will need to be convinced that an algorithm can deliver the expertise offered by a financial advisor with a proven track record of asset allocation. Few need reminding, how algorithms failed to differentiate between fake and real news during the U.S. Presidential election.
Robo-advisors are now being asked to prove they have the necessary skills to satisfy sophisticated investors. Baby boomers are looking for advisors who can respond to the complexities of the market and the individual circumstances of their situation. We will soon find out, if technology is able to learn and adapt quickly enough.
Chris Ambridge is the President of Transcend Managed Accounts. It is a fee-based investment solution that combines multiple unique services into a single investment portfolio.