Advisers + Technology: Better than Either Alone?

Journal of Financial Planning: January 2015

If you think you’ve read enough about robo-advisers, this roundtable will change your mind. The experts gathered here offer thought leadership on the newest wrinkle in the robo-trend conversation: the powerful notion that technology-augmented human advisers are better than humans, or technology, alone.

Journal of Financial Planning practitioner editor Michael Kitces, moderator of this roundtable, uses the moniker “cyborg advisers” to describe the blending of human and technology in a way that lets each do their best thing. United Capital’s Joe Duran recently referred to these augmented advisers as “bionic advisers.” To get a handle on this, the Journal convened tech experts/commentators Joel Bruckenstein and Bill Winterberg with execs from two leading financial technology companies, Betterment Institutional’s Steve Lockshin and Motif Investing’s Hardeep Walia. Here’s to the adviser of the future.

Michael Kitces: Let’s start with the term “robo-adviser” itself. It’s bounced around for a few years now. The first ever mention I can find of it was a panel session that Bill Winterberg led at the T3 Conference in February 2012. So let’s start with you, Bill, since I feel like you coined the term in this context. How would you define robo-adviser, and since it’s even a bit of a controversial term, is there a better alternative we should be using now?

Bill Winterberg: Yes, there is an alternative term we should be using. I use the term “low-cost online investment service.” When that panel was organized back in early 2012, Wealthfront was advertising itself as, “Fire your financial adviser. We are the new advice platform for consumers.” So I took their marketing and spun it into “robo-adviser,” because Wealthfront was claiming it was delivering advice, but in fact, I think it was a miscommunication on Wealthfront’s part, and you’ve seen in their marketing that they have distanced themselves from the adviser terminology. Now they’re a “digital investment service” or an “online investment service,” and they are very clearly getting away from that adviser moniker. 

So I prefer to use the large umbrella term of “low-cost online investment service,” because that’s what the majority are—not all, but generally, they are providing investment allocations, model portfolio recommendations based on some simple client survey questions, for a low price. And I think that more accurately describes what these services provide on their direct-to-consumer platform.

Kitces: Joel, what about you? What do you think about the robo-adviser label?

Joel Bruckenstein: I have a slightly different opinion than Bill on this. I kind of like “robo-adviser” for a number of reasons. One is, it seems to really annoy some of the consumer-facing platforms that are out there today, and I’m an advocate for advisers, so I don’t mind poking the opposition in the eye a little bit. And I do think it accurately describes some of them. I think there’s definitely some advice component to some of what they’re doing, although I would agree with Bill—it’s not the prevalent thing. If you’re giving advice on rebalancing, for example, even if it’s an algorithm, there is some advice component. 

But when I think about the difference between how the B-to-C robo-advisers are framed and how the B-to-B ones are framed, and how advisers think about them, I divide it into two things—the business model and the technology. 

So when I refer to the technologies that I think advisers should be adopting—the ones robo-advisers have adopted—I’m starting to call them robo-technologies because I think people intuitively understand what it means. It means separating out the technology from the business model.

Kitces: I wrote the first article on the emerging robo-advisor trend back in 2012 just a few months after that T3 Conference coined the term, and back then it meant a fairly narrow, specific thing. Not to put companies in a box, but it was the platforms like Betterment and Wealthfront that were specifically providing an automated investment service, algorithmically applied, delivered directly to consumers. As more and more technology companies have come into financial services and we see this rise of financial technology or “FinTech” companies, it feels like the whole robo label has gotten a bit muddier.

Motif, for instance, has been dubbed a robo-adviser at some point or another, but I’m not sure that the term is quite the right fit for what Motif does. Hardeep, what’s your take on how we should be describing these companies and solutions?

Hardeep Walia: I’ve used the term “robo-allocator.” It’s probably a better term to describe them, because we don’t think they really do advice. But we’re not a robo-adviser or allocator. We target self-directed platforms. We do have an adviser offering, and we’ll talk later about how advisers can be working with these technologies.

I’ve heard [the regulators] call these automated advice tools. So if you look at how the regulators are looking at this entire sector, it really is about algorithmic advice driven through these models. “Advice” is a very specific term, and I think it is disingenuous to say you’re getting advice. What you are getting is a smart allocation model and some reporting that keeps you up to date. I’ve always used the litmus test of taking any of these questions and going through the models once on a good day when the market’s bullish; once on a bad day. You’ll get very different answers just because there’s an emotional connection that you’ve got to really factor in when you’re doing some of the analysis. We do believe in the value of an adviser, which is specifically why we didn’t launch a robo-allocator. We decided to work with advisers, because we think software can automate a lot of different things.

There are two things we think are very, very hard to automate. One is the human relationship. A lot of value comes from the adviser through these human connections. And, two, tailored financial advice is really hard to do, especially as you go up the wealth ladder. Wealth management is complex. It’s very hard to get tailored, customized advice through software. So we’ve specifically targeted working with advisers on automated advice tools to help them do their job.

On the retail side, we’ve allowed people to go build what they want to do, but we haven’t gotten necessarily into the robo-allocator world.

Steve Lockshin: I’m okay with the term “robo,” I think it defines the category. I think the word “adviser” narrows the category too much, because using the word “platform” is really what the institutional or the B-to-B side ends up becoming across the spectrum. Whereas, I do think there is an adviser component on the direct-to-consumer side, at least for Betterment, because there are proactive prompts on the behavioral finance side that actually do cause investors to pause before they do things like reduce their allocation to equities in a down market. Betterment recently announced a pop-up that will tell a consumer what the tax implications will be of an adjustment in their allocation. And that’s just a simple example of what an adviser might do.

But on the B-to-B side, I see this as an accelerator, a platform, a different experience, whatever you want to call it—a way to introduce advisers to technology that can [increase] their time spent serving consumers, because they don’t have to spend it in the back office. It will actually increase the face-to-face time with clients, which I agree is difficult to replicate via technology.

There will be consumers who want to do it themselves and there will be consumers who want to have an adviser, and I think the tools can benefit both sets. And as I always say, there’s chocolate and vanilla for a reason. If we want to call chocolate the all-human, historical way of advising clients and vanilla the new, digital solution [directly to consumers], then swirl, if you will, as the B-to-B solution, [is where] everybody wins if properly adopted.

Kitces: Well, that’s a nice label for it. I call them cyborg advisers—half human, half technology and let each do their best thing. Although I think vanilla/chocolate swirl is much more palatable. 

But in terms of advisers adopting B-to-B “robo” solutions … advisers have had rebalancing and trading software for a decade. It may not be widely adopted, but it’s available. So how do you distinguish an adviser using a robo platform versus an adviser simply using rebalancing and trading software? Are they the same thing? Are there differences? Is one better than the other?

Bruckenstein: I think you’re talking about a whole different experience and that’s the point. As you pointed out, we’ve had rebalancing software for a long time. I think one of the reasons adoption is not better is because it’s not all that user-friendly. I think another reason we haven’t have wider adoption is because of the cost. Probably a third reason is because the integration hasn’t been what it should be. I think the overall answer is the user experience just hasn’t been that good both on the back-office side and particularly on the client-facing side. 

If you look at the appeal of robo-adviser technologies to an advisory firm, it’s straight-through processing that a lot of custodians and broker-dealers are still struggling to provide in a seamless manner. Also, it’s the user experience. I’ve written many times that the user experience a client gets on a robo-adviser platform is better than the experience they get on an adviser’s website or portal probably 90-plus percent of the time.

Kitces: I don’t want to oversimplify it, but does that basically mean for the past 10 years we had rebalancing and trading software 1.0, and this is just rebalancing and trading software 2.0?

Winterberg: I don’t think that oversimplifies it.

Bruckenstein: If you look at rebalancing software, you’re saying we’ve had it for 10 years, well, 10 years ago there was probably one good, comprehensive, tax-efficient solution, right? iRebal, and it was very expensive; it was not easily integrated. And if your business was not comprised of very wealthy clients with complex portfolios, you probably weren’t going to buy it, because it just wasn’t scalable for small accounts at that time. Then look at where robo-adviser platforms, the robo technologies are. So that’s just one simple example of why you’re comparing apples to oranges in a sense.

Winterberg: I would add that the marketplace for B-to-B investing solutions or allocation solutions or rebalancing solutions is limited. If you get 100 percent of the RIA market, you get 60,000 firms. If you get 100 percent of all financial professionals out there, you get 300,000 to 400,000 advisers and that’s it—you have complete market saturation and domination. If you’re going to develop tools to be robo-allocators and do block trading efficiently for low cost and low transactions, why limit yourself to an audience of 400,000 users? Why not go direct to the consumer?

So they’re thinking, this software can’t be that hard to build—let’s build it and give it to consumers for a super low price. Now hopefully 60,000 people is a good month in onboarding users and giving them access to low price. So there’s a marketplace element as well of how many advisers can a software firm serve with its proprietary software versus taking it direct to consumers and the impact that it could have there.

Bruckenstein: There is a B-to-B element to it as well because let’s face it, if you’re talking about what type of client a traditional RIA firm could serve, the numbers are limited because the minimums kept going up, and you’re getting into the top 1 percent, and at a lot of firms, maybe the top half of 1 percent of the population. This allows firms that want to go in that direction to serve many more clients and to go down a little bit on the income scale and on the asset scale. So it’s not just about being able for the B-to-C to reach more people. It’s also about the traditional advisory firms and the broker-dealers to be able to cost-effectively serve a much broader cross-section of the American public.

Winterberg: I think there is a good point that was mentioned earlier—it isn’t just the fact these technologies are available; it’s that they’re getting easier and cheaper. I think we’ve seen this in the consumer world. We’re using all these different consumer platforms, and advisers are thinking, why is it when I come to work I don’t see that kind of capability?

Rebalancing, for an example, was a very complex implementation. It was more of an enterprise deployment. Why can’t it just be a feature in a platform that gets weaved in so I don’t have to do all this work and I don’t have to go out and get consultants? I think there’s this consumerization of the enterprise. And for advisers, it’s the same thing. They’re looking to new technology to make their lives easier, to make it simpler, to deploy effectively, and I think those trends are coming, and [advisers are] seeing this as they use different technologies.

Kitces: What about the messages being communicated to the public and in the media about robo-advisers, which is a focus on reaching young people, reaching those with fewer assets, and expanding advisory services beyond the top 1 percent or 5 or 10. Joel mentioned this briefly, but I’m struck how little this has come up in our conversation so far, about reaching other populations. Is that part of the robo-adviser-for-advisers trend or not?

Winterberg: We talk about millennials and the fact that most of them live a digital life. I think if you’re younger than 40, you’re probably used to working on your iPhone, your iPad, your Android, whatever. And the experience is what matters, but that’s like trying to describe an emotion. It’s very difficult to sell a new experience; you have to experience it. 

From the adviser standpoint, these solutions are really about creating time. So in general, the industry agrees that the real value is in the planning, in the relationship, in the advice that they get from the human and that the allocation, the manager selection, the rebalancing, these things are all somewhat commoditized. So a real B-to-B platform is going to create time and space for the adviser to do what they do best, which means they can serve a different market, a different scale, as well as their existing market and create a new experience for both. To me, it’s about the experience, and it’s about creating time.

Bruckenstein: I don’t think there’s any doubt that this type of experience is more likely in the long term to be attractive to the millennials, but I think what doesn’t get enough attention is that it’s not just the millennials who want this experience. I mean, I used to have to go to the bank every day. I hardly ever go to the bank anymore, and I’m not a millennial. I think there’s a lot of people in my age group who also want a better experience. So to the extent that technology provides a better experience, people are going to want it.

There’s this misconception among advisers that hey, I spent a lot of money five or 10 years ago to build a client portal and nobody uses it, so my clients are too old, they don’t want the technology. It’s an absolutely wrong conclusion. The conclusion they should have reached is, my technology was not good enough to attract people to use it. Now you’re seeing better technology that people do want to use.

Kitces: Most of these platforms have been not just about having a better user experience and improving some of the technology, but they’ve also generally embodied an extremely low-cost, passive style investment process. So I’m curious, are robo-platforms synonymous with passive?

Lockshin: No.

Bruckenstein: It’s absolutely not. A lot of the B-to-C stuff is trying to go for the lowest cost and the greatest simplicity, and a lot of them today clearly are passive, but there are [more active] platforms out there. One good example is Advisor Connexion from Folio Institutional. You can pretty much put anything that they custody (they are an RIA custodian and a broker-dealer) through their folio, so you can create folios of individual stocks, of combinations of stocks, mutual funds, ETFs, whatever you want. So the technology exists today. Is it being widely used yet? Well, we’re still in the infancy, but I think that’s the direction we’re going in.

Walia: Our model at Motif is you get to choose. We’ve got advisers using our products that are purely passive. We’ve got active managers also using our platform.

I think there’s a focus on simplicity for the B-to-C [platforms]. They don’t want to deal with the complexity of picking, so put them in a model, keep it low cost, keep it diversified. But for us, when we offer our platforms to independent advisers, we call it autopilot. It’s not robo-adviser for advisers; it’s you want light oversight, you want to build whatever models you like. The autopilot really just helps them manage, but that management could be active or passive.

Kitces: If advisers are going to start adopting robo-adviser platforms, does that mean the business models and the pricing structures for advisers have to change, or do they just keep doing what they’ve been doing with new technology that makes it easier for them?

Lockshin: As we talk about the Betterment Institutional platform, the No. 1 concern we hear is: if folks realize they can go get this for 15 basis points, what’s it going to do to my business? And the simple answer is an example of: if today, you, the client, go to see Joel, the adviser, and he pitches you on why you should give him your million dollars for 1 percent, and you leave thinking, great, I’ll come back tomorrow and fill out the lengthy paperwork that Joel has to prepare. And the next morning you walk in and say, “Joel, I’m all ready to sign, but before I do, I met someone last night who told me about these robo-adviser platforms, and for 15 to 25 basis points I can get what you’re charging me 1 percent for. Why should I pay you?”

Inevitably, every adviser says, “Well, you get me. I know your family. It’s the advice I provide, an estate plan, etc.” You can go through the litany of choices, but they all have a very good answer for why they are worth the premium. 

The answer is exactly the same on the B-to-B side. All the B-to-B solutions are doing is enabling advisers to do their job, add their value better, faster, and with a better experience than we can deliver today. Otherwise, the value proposition is exactly where we say it is in the industry. It’s the human-to-human piece that is accelerated by the technology.

Walia: I think it is fair to say that for advisers who focus on small accounts without any kind of complexity, you are going to see some fee compression, but it’s also an opportunity to streamline your operations and actually bring costs out of your equation. This is a nice opportunity to rethink your own economics of, how am I running today, and is there a better way? Can I use technology to cut my costs? And then I have a choice of either keeping some of those [cost savings] or actually bringing down my [client] costs and being competitive. 

I think on the lower end, there is a real trek for these B-to-C models. It’s probably simple models where the differential between doing it myself and me having an adviser is incremental. And I think that is a small portion of the market. I think for any degree of complexity, advisers really don’t have anything to fear and these technologies actually become an opportunity for them to improve their own economics in ways that weren’t possible before. So it really is an opportunity, but advisers have to pick their customer base wisely.

Lockshin: I both agree and disagree with that a little bit, in the sense that when I asked my friend Ric Edelman, who has an average account size that is in the mass affluent space, how he charges (which is, let’s say, higher than the average adviser and he’s predominantly passive), his answer was a very simple one and it was legitimate: if I stopped that client from buying the 110 percent mortgage condo in Miami in 2007, how is that reflected in the pricing of managing their $100,000? It’s the human-to-human piece that I just don’t think technology is going to be able to solve.

Bruckenstein: I think this is a very complex question that we probably could write a whole separate article about.

I don’t know how many of them are out there today, advisers who were essentially creating asset allocations and calling themselves planners, but they weren’t doing very much planning and charging 100, 150 basis points. I do think those days are gone. I do think there’s going to be margin compression there if you’re not delivering real value.

I agree with Steve. It’s legitimate to charge for advice that’s going to save people a lot of money. The problem this industry has is, the pricing is not linked to that advice today, it’s linked to AUM and that also is going to have to change. And again, I think the net result will be a compression in margins.

People who are wealthy and have complex situations will pay a premium for premium advice, but they are not going to pay a premium price whether they have $50,000 or $10 million for essentially a passive allocation of ETFs. It just doesn’t make sense. And that is the part the industry hasn’t really reconciled itself with yet.

Kitces: If I look at pretty much any advisory firm’s fee schedule, we all have different price points, but the structure is pretty standard—we all have these graduated rate schedules that decline as the asset base rises. So it’s a fascinating phenomenon to me that the robo-adviser trend is leading to the exact opposite, where the smaller clients end up with the simplest, lowest-cost portfolios, and the higher net worth clients end up with the higher total cost in charges because we’re doing all these additional value-add services because their lives are more complex.

Bruckenstein: You can drive down the cost on some of these platforms to almost zero to have assets on the platform, but there’s still the management fees. If you are doing some kind of asset allocation creating your own portfolios, I think clients are still very comfortable paying for that if they feel there’s some alpha there. So that’s one source of revenue that maybe is getting overlooked a bit in these models. It doesn’t all have to be passive. And if it’s not passive, and you’re creating value, you can charge for that value.

Kitces: So if you want to get paid for what you do as an adviser, you go in one of two directions: you have some kind of active management value and you deliver alpha, or you have some kind of financial planning value and you deliver what Morningstar is now calling gamma. Charging for beta is dying, so you either go alpha or gamma or some combination of the two?

Bruckenstein: Yes, I think so. You could even do a passive strategy, right? You could put together a portfolio, create your own indices if you want (for lack of a better term) and charge clients. Look at what Schwab is doing. People are saying, “how are they going to make money if they’re pretty much giving away the platform?” Well, presumably some of the funds in there will be Schwab funds, and they’re going to make money on that. The more people on the platform, the more money they make.

Well, if an adviser has his own folio or his own fund and he can leverage this technology very inexpensively and put it out to a large client base and charge something for that, that’s one way he can make some money.

Walia: Yes, and we’ve implemented that. We have a classic ETF allocation model that is available completely free to our clients. We don’t charge transaction fees. We don’t charge management fees. We don’t make any money. We count on [clients] saying, “All right, we’ll buy this, but we might be interested in another motif [as well].”

Advisers want to build their own models. It took our customers [only] a year to build 75,000 motifs. There’s value in how you actually build them and giving people the tools to do that. But I couldn’t agree more with this notion; we call it thematic beta. There’s beta that’s pretty cheap, it’s pretty easy, and in our model, it’s zero cost to implement, but if you really want to do something different or a thematic beta, you’ll pay a price.

Advisers can actually take their models and sell them to other advisers [if] they’ve got a knack for building models. There’s kind of this co-creation model that goes on. You’re going to see the business models of these companies evolve, and you’re going to see some really fascinating stuff. You’re starting to see this already—very interesting models that weren’t contemplated earlier.

Lockshin: This is a religious discussion on active versus passive. The jury’s still out on whether there is alpha from tactical, whether from active, and can we throw costs and taxes and behavioral issues into that. I do think it’s generally accepted that on the value chain of what an adviser can deliver to a consumer, choosing managers is probably the lowest component, and at times can be a negative component.

Winterberg: I’ll take a different spin. If you throw half a dozen engineers in a room and tell them to solve problems in investment management, they’re going to gravitate toward things that can be measured, calculated, and quantified; that’s what engineering is all about. So you’re going to look at standard deviation, correlation, Sharpes and Sortinos, and expense ratios, and tax ramifications. Everything that can be quantified gets built into your algorithm and pretty soon the online algorithmic providers realize that the factors that increase successful outcomes for their customers are the factors that can be controlled. And those controllable factors largely are dominated by cost and then appropriate diversification.

That’s why, in my opinion, the automated services offer these low-cost portfolios for low price points because that’s a controllable factor that the algorithms can dial down to increase the odds of success. There’s no guarantee, but you’re throwing engineers at the problem, and this is what engineers do, speaking myself as a 10-year software developer—you go for things that can be measured and that’s how your algorithms run.

Walia: I think that is absolutely true today, but I think it’s changing. For example, we have algos that do what a typical robo-adviser would do. So we have alpha algos that are more active, and we have an algo model that we implement through a motif that will essentially do what I wanted to do in my trading days. Now I don’t have time to trade—to scour the market, look for the most beaten down stocks and buy them at an optimal point. That’s a very difficult algorithm to put in place, and we spent a lot of time developing it.

So I do think the next wave is going to be algos, but not just the passive models; it will be more sophisticated.

Bruckenstein: The other thing you guys are leaving out is the behavior side. If all of your friends are invested in the S&P, what do you have to talk about when you go to a cocktail party? There are always some people, and it’s a significant number, who don’t want to track the S&P and who want a more active manager, for better or worse. They don’t care what the engineers say, and they don’t care what the algorithms say. They believe that there’s a better way and there are always going to be those kind of people.

Walia: Maybe the market needs those kind of people, too.

Bruckenstein: Exactly.

Kitces: We have robo-adviser platforms that do some of the automated investing, we have the platforms that start layering on automation of tax-loss harvesting, rebalancing, and maybe asset location. And what’s emerging now is robo-adviser platforms as full-on trading platforms for at least the people who want to be doing trading. Is the next step that these become more sophisticated trading platforms?

Winterberg: Well, sure. The startup, or whoever—Wealthfront, Betterment—they need to make a business decision of: we’ve done a great solution on the passive side, now let’s release an active algorithm and let consumers choose, because like Joel said, there are going to be consumers who want that. Either [these companies] are going to write it and design it, or someone else is going to come in say, you can have all the consumers who want passive, low-cost management; we provide the world’s first active algorithm for 15 basis points. And it will attract a certain segment of the population.

The leaders right now have picked their market, and they’re trying to exploit it and command it as much as they can, but there are still these opportunities. But I don’t think that’s the biggest shoe to drop.

Bruckenstein: I feel there’s one thing we haven’t touched on that maybe we should. We’re talking about all these new technologies. The new technologies and the new providers are not the ones that control 99 percent of the wealth in the United States. The more traditional providers and the service providers that serve those firms, they’re not just sitting by idly, waiting for Betterment and Motif to take all their business away. They’re spending a lot of money on R&D as well and doing their own development. So I think it’s worth noting that we are in the very early innings of what is somewhat of a technology revolution in the industry. There’s going to be a lot more money thrown at some of these problems and solutions than anybody is really talking about today.

Walia: I think what’s exciting about companies like Betterment and Motif is the demographic shift. We could say that in the next two decades our entire customer base is going to turn, right? You’ve got this wealth transfer that disruptors like to take advantage of, and you are on the defense if you’re encumbered because of these demographic shifts. 

We [the profession] try to bucket consumers, whether it’s through an adviser or a self-directed model, as kind of a one-size-fits-all, but we do a lot of studies of consumer behavior and some people will have very passive money that they don’t want to touch and then they’ll have, to the earlier point, their cocktail party money. They want to go trade. We’ll say people are one or the other, and that’s not true. Most people are actually both; they’re schizophrenic. They’ll put their 529 plan in passive strategies and not mess with it, but they will have play money. And so it is actually a pretty rich customer base. 

The exciting part is there are these continuity changes that are going to benefit the new entrants. And I think the new entrants are less going to compete with each other, but they’re going to compete with the bigger firms.

Bruckenstein: Well, I don’t disagree that there’s a major demographic shift about to happen, but I think there’s still time for some of those incumbent players to right the ship by either developing their own technologies as Schwab is doing, or by buying up some of these upstarts. So we’ll see. I think it’s very early in the game to make those kinds of predictions.

Kitces: Where is the technology going? How are we going to see this environment shift over the next few years?

Lockshin: I think we’re going to see advisers forced to adopt technology. In the traditional sense, you’ll have folks who wait, and depending on how fast things move, some will wait too long. We’ll have early adopters too. But for me, the landscape has moved faster than I even thought it would, and I thought it would move fast. I think it is difficult to explain what the next two to three to five years [will hold], but I think to ignore the impact of technology on both direct-to-consumer and adviser-to-consumer would be foolish on the part of any adviser.

Bruckenstein: I agree. I think the evolution of these technologies is happening much faster than most people expected. At the T3 Conference in February, we’re planning on having quite a few of the new robo technologies on exhibit because we think advisers need to become familiar with them yesterday. From what I see in the area of the more traditional custodians and the traditional technology providers, this has been a real wake-up call for them, and they are making some real efforts to up their game and provide advisers with the tools to compete with these new upstarts. I think it’s too early to say exactly the path this is going to take, but I do agree that if advisers don’t rethink their technology platforms and their business models, some of them are in real danger.

Walia: I think purely B-to-C models are going to struggle. I think a lot of these new technologies are going to end up partnering with the incumbents and institutions to get distribution. You’re starting to see elements of that, and I think the assets are not only with the big firms, but they’re also with the adviser channel.

I think you’ll see a lot more partnerships. I think the purely B-to-C model will be less effective than partnering with the industry to get this technology mass distributed. You’re seeing some of that already, but I think that’s how the new technology gets distribution, gets scale—it’s actually through partnerships with advisers specifically. And through that they’ll be a more efficient industry. So I think you’ll see a lot more win/win, especially with the independent advisers, but even on the larger front, you’re going to see incumbent partners learn from these new upstarts. A purely B-to-C model alone will take its own pace, but it will lose out to these partnerships where you’ll have broader adoption.

Bruckenstein: It’s kind of ironic that the B-to-C model acted as a catalyst for our side of the industry to respond, and now it is responding. And I agree, I think long-term, these technologies are going to be adopted by both more traditional players and individual RIA firms, and that’s going to be where the success of these technologies comes from.

Winterberg: I take a different slant. In the next several years, I don’t think the robo trend stops with investing and asset allocation. I do think that the next shoe to drop is robo-planning and robo-planners. We see it with IBM’s Watson supercomputer on Jeopardy. Now they’re applying that technology to health care with interpretation of electronic medical records and drug interactions, which is an impossible task for one physician to manage all that information. I think the same technology, whether it’s IBM’s Watson or somebody else, will be applied to financial planning and wealth management, because an algorithmic system can monitor insurance premiums on a daily basis, and mortgage rates on a daily basis, and the chance someone’s going to be diagnosed with cancer on a daily basis, and make its best guess at what a consumer’s choices or decisions with their money should be. But where does that leave the adviser?

The adviser needs to become a behavioral finance expert and be able to interpret this augmented algorithmic planning, and interpret it and communicate it to their clients so it becomes less about stock selection and less about filling in boxes on a financial planning intake form to see what numbers are spit out. It’s now about: here’s an extension of the global planning advice wrapped up in a computer; now let’s interpret it, apply it to your situation, and manage your behavior so, Mr. and Ms. Client, you’re doing the right thing to improve your future.

Kitces: Any final comments? 

Lockshin: This opportunity presents a huge differentiation challenge for the adviser community. It was fairly easy to scoot by the last 10 or 15 years and run a fairly successful business. There are plenty of successful advisers out there, but now there’s more information and more options for consumers that the big challenge for advisers is, how do I differentiate myself? How do I clearly communicate the value that I add, and will my clients and consumers understand that? If they don’t understand it, they’ll go to other solutions. But if the value proposition is clearly differentiated and clearly communicated, then it makes a decision clearer for that consumer, for that client, to make. And hopefully they’ll make the decision to work with a human adviser.

Bruckenstein: I think what all of us are saying is that there’s really a tremendous opportunity for independent advisers here, but the thing that worries me is, to date, most advisers don’t see it. The 2014 technology survey for Financial Planning magazine showed that only 18 percent of advisers see an opportunity with these robo technologies, and I find that very troubling. So I think we have some work cut out for us to change people’s attitudes.

Walia: I think it’s an exciting time for both the adviser community and the B-to-C community, because now we’re seeing better technology, and I think there’ll be something for everyone. There’s a whole ecosystem that will come about on what’s the better robo-allocator or robo-adviser, whatever we choose to call them. For me, it’s just remarkable how there’s so much innovation that’s happening and it is a relatively recent phenomenon. It is a pretty exciting time to be in our industry.

General Financial Planning Principles