Apocalypse Later

Sometimes the world doesn’t end.

Source: Pixabay.

A few years ago, the financial world was buzzing about “robo-advisors.” These web sites and smartphone apps were going to revolutionize investing and wealth management. The services start with a set of interview questions, then make investment allocations into various Exchange Traded Funds. By using algorithms to provide rule-based recommendations using low-cost index funds, their hope was to provide inexpensive advice with low account minimums.

The project began in the US, with a couple of independent startups. Soon, most of the major financial companies started either building their own platforms or partnering with a fintech startup to capitalize on the trend. Today there are over 100 different robo-advisor apps and web sites with over $130 billion in assets under management. While that pales compared to the $60 trillion in investment assets in the US, the growth rate is dramatic, and robo-advisors follow the aggregation technology model of digitizing services and distributing them to a mass audience.

Aggregator model. Source: Stratechery

What Uber had done to mobility service and Google to information search and Airbnb to hotels, robos could do to investments and wealth management: redefine, disrupt, and get rich off the distribution. Right?

Only it doesn’t always work out.

Finance is more complicated than buying a book or staying in someone’s apartment when you’re on vacation. People get nervous handing over the bulk of their wealth to a faceless computer program. Young folks may be more willing to experiment, but most of their wealth is human capital, not financial capital. They can – and often do – earn their way out of any investing mistakes.

People with financial capital hire people they trust to help them manage their money, because people trust people – not programs and algorithms. We know that programs and algos are written by people, after all. And clumsy attempts by some financial firms to cash in on the growing robo-advisor trend are running into these marketplace realities and cultural problems with their existing wealth management operations.

That’s what I thought about when I read that UBS – the Swiss banking giant with over 50,000 employees and more than $3 trillion in assets under management – is shutting down the online robo-advisor platform they launched with great fanfare just a year and a half ago. Dubbed “UBS-Smartwealth,” the service only required a $20,000 minimum investment, compared with the millions usually needed to gain access to UBS’s private bankers.

Source: Wiki

The company’s hope was to attract a broad base of younger new clients to the staid, successful UBS brand – the next generation of wealth. But the effect was to undercut UBS’s existing staff and eat into their margins by cannibalizing their own business. After all, if a client can save tens of thousands of dollars in annual fees by shifting to their advisor’s own online offering, why not switch to a digital platform within the same company? You don’t even need to transfer the assets. And as baby-boomers continue to retire in record numbers, there are a lot of new investors inheriting new money, and a lot of existing financial advisors who are stepping aside. It doesn’t usually make sense for a company to disrupt itself. These human transitions are a big deal, especially in finance.

Source: US Census Department

Robo-advisors will have their place, probably as part of the discount, do-it-yourself financial community. Already, the most successful services are offered by Vanguard and Schwab. But the apocalypse that industry-watchers predicted just a few years ago – that financial advisors would soon go the way of travel agents and radio DJs – hasn’t happened. Just because something’s bright, shiny, and new doesn’t mean it will be successful.

It’s going to be a while before the investment industry is hollowed out by robots.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-09-03T08:32:21-04:00September 3rd, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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