Advisory Services: No Robot Invasion Here

Robo-advisors were supposed to overrun the world of investment. They didn’t.

Yan Barcelo 29 January, 2024 | 2:43AM
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Over the past decade or so, one of the innovations in the financial advice space has been the advent of robo-advisors. Back in 2020, Deloitte released a report titled ‘Hands Off, Guard Up’ that outlined the risks in the space, saying, ““Robo-advising will clearly no longer be a fringe or experimental part of the market. Incorporating these offerings may entail more than bolting on a technology capability. Robo-advising opens new frontiers in analytics, customer satisfaction, and fiduciary responsibility. But it also exposes institutions to new risks they shouldn’t underestimate.”

Fast forward to today, and the world of financial advice is in better shape than ever in the USA, finds a recent survey by Cerulli Associates and the Securities Industry and Financial Markets Association. (Note: the results don't include Canada, but this author believes it is safe to assume that they apply here as well as across the border.)

First, advisors are taking on more clients than ever. While the advisor-based investor segment occupied just 35% of the total individual investor population in 2009, it has grown to 47% by 2022. By contrast, the self-directed investor segment, over the same period, declined from 41% to 24%. Cerulli’s survey reached 10,000 respondents, 64.8% of whom have assets of less than US$100,000, 12.7% between US$100,000 and US$250,000, with the remainder exceeding US$250,000.

“Over the past decade, notes the study, investor confidence in advisors and interest in financial planning has grown significantly, and we expect this growth to continue. Investors recognize the value of advice in navigating complicated choices and realize that this comes at a price they are willing to pay.”

Interest in Human Advice Has Grown

An overview of the market's growth shows that robo-advisor sites never really threatened human advice. “There was an expectation that investors wouldn't want to talk to advisors anymore,” recalls Scott Smith, Director of Advisory Relations at Cerulli Associates, in a telephone interview, “that they'd only want to talk to bots, and that they wouldn't want to pay for advisory services. All these fears turned out to be unfounded.”

“We've found over the past 10 years that only a very small percentage of investors want to deal with a robo-advisor, says Amy Arnott, portfolio strategist at Morningstar Research Services. When making major decisions about their money, people want to interact with a human.” That's why robo-advisors have captured only a small share of the market, she continues: US$740 billion out of a total retail market of US$31.4 trillion (portfolios ranging from $100,000 to $5 million), or 2.3%.

One is tempted to believe the opposite: robo-advice has increased interest in human advice. Until 2014, the proportion of “advised” investors remained stable at around 35%. The year 2014 could be considered the year of the emergence of robo-advice in the United States, with the launch of the Betterment website. However, from 2014 onwards, the cohort of advised investors showed effervescence, rising to a share of 42% in 2017. After a brief dip to 39% in 2019, it rose inexorably to 47% in 2022.

Demand for advice has never wavered “despite a seemingly limitless array of information and tools designed to enable investors to play an active role in managing their own investments,” notes Cerulli Associates. In fact, the study adds, advisors are far from suffering from the anticipated ransacking: “Rather than facing the threat of falling demand, advisory service providers are more often faced with the challenge of expanding their businesses to offer a greater variety of advice to a wider range of clients.”

Other figures are equally encouraging. Whereas in 2009, only 38% of investors were prepared to pay for financial advice, 63% now say the same. “Investors recognize the value of advice in navigating complex choices, notes the study, and they realize that this comes at a price they are willing to pay.”

In the same period from 2009 to today, investor satisfaction with their advisor has also reached new heights. While 61% of investors said they were satisfied with their advisor in 2009, this rose to 81% in 2014, the same year robo-advisors exploded onto the scene, and this satisfaction rate has remained the same since with only minor variations.

Moving Toward a Hybrid Service

Very intense a few years ago, concern with management fees is waning, having declined by 9% from 2019 to 2022. On the other hand, other concerns are gaining in importance, notably the minimum investment thresholds required by investment funds, up 5%, and the underperformance of active management compared to market indices. For investors looking for an advisor, the main concern is finding one they can trust.

The main challenge facing the advisory industry is to serve the cohort of investors under the age of 50. This group shows the highest interest of all in financial planning, but is poorly served by wealth management firms that focus their efforts on older, wealthier asset holders.

Automated services are not dead, but their offering is no longer a death sentence. Cerulli sees a growing integration of the two fields, a hybrid offering that combines robotics and humans.

However, judges Amy Arnott, this hybrid offering will not be so much about robo-advisors per se, but rather about artificial intelligence and the degree to which it is integrated with IT systems. “We'll probably see more and more advisory firms integrating artificial intelligence into the back office, she says, where algorithms will take care of selecting funds, rebalancing portfolios and making retirement projections. The human advisor will become the interface between this digital processing and investors.”




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About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, Yan writes for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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