As a watcher, creator within, and critic of the robo-advising space, I’ve seen the future unfolding firsthand for a long time now. I’ve written about why I think this robot movement is going to be big. I’ve also written about why I don’t think it’s going to work in its current iteration for many of these firms, in the near-term, as well.
These last couple of weeks some things have been shifting in my mind, and the space, and I thought I’d share these insights with you today.
1) How to make a fire burn hotter, and longer:
The best way to make a fire is pretty simple… you need fuel.
In the world of fire-making, fuel is basically one of two things: 1) Air (in some cases hot air) and 2) Wood…(or anything combustible if you’re a pyro like me).
Oh sure, there’s accelerants too, but that’s assumed here… to make a “little” fire “big”, let’s assume venture capital money is that accelerant — if you’ve been watching the space, you know the campfires at Wealthfront, Betterment, etc. — have gallons of gasoline to make the fire bigger. The problem with accelerants, though, is that over the long-haul, an accelerant doesn’t really change the potential of the fire… they only accelerate it. If there’s not enough of either air or fuel, over the long haul… you simply get a flash in the pan. Boom and bust, with nothing but ashes to show for it.
In the world of robo-advising, more air would be the equivalent of more attention… more validation. Air is the lifeblood of any endeavor really… if people don’t believe in you or your product, then it exists in a vacuum — no air — no fire. But that’s certainly not the case with the robot-advising movement… people believe. And they’ll continue to believe as long as the fire burns. But if we all sit here, believing our brains out, blowing on the glowing fire we’ve all built with a gallon of gasoline by our side… at some point that fire is still going to extinguish itself simply because we still don’t have enough fuel for a sustainable fire. We need wood for that. Dry, ready-to-burn wood. And that is a precious commodity.
“Wood” in this case is customers… and certainly we’ve seen customers joining these firms, but will the pile be big enough to build a bonfire to warm ourselves by happily ever after? The answer is no. And the reason I know the answer is no, is because all of these firms are at different stages of trying to grow that pile of wood by adding institutional offerings to advisors, and brokerage firms… they are telling you, and me, and everyone watching… they need more wood still. But will that be enough? And again, I believe the answer is again, No…
Our fireplace only burns cash today.
Today, if you want to become a customer at any of these robo-advising firms (directly or through one of the new institutional channels) you have two choices to make… invest new cash, or sell your existing portfolio, converting it to cash, to invest at RoboInc. And, that’s not exactly a great choice for many. I liken it to the equivalent of being on a boat in the middle of the sea, and being told by the captain, “your boat sucks… we’re going to tear this boat apart in the middle of this ocean and build a new one… maybe a better one… and chances are, it might be better… chances are… you might be better off 10 years from now….”
That’s not exactly a comfortable or convincing argument in a scenario where emotions are probably running very very high, in the middle of an ocean. And so, how many people are going to jump at that chance? Today, we know that about $3 billion dollars of money and maybe 50,000 people have made that move. And while noticeable, it’s also not much more than a ripple in the tide that is investable funds or customers within the US alone.
And sure, logically, you can do the extended math, and make assumptions about what that choice means twenty years from now… but in many cases, dare I say most… people are maybe, probably, better off not “wholesale” selling off their portfolios just to have it be reinvested in a basket of index funds that are rebalanced monthly.
So, today in its current form Robo-advisors really are smart to chase the mass-affluent millennials… and they’re smart to chase IRAs, because there is either no friction in that decision to hire RoboInc., or there’s much less friction with making the decision to sell off their portfolio to rebuild a new one because taxes aren’t an issue. And, that market isn’t small… it’s actually about $1.2 trillion dollars among the mass affluent (50k to 2.5 million in investable assets)
But the Robo-Advisors are still missing boat loads of fuel by not navigating an ocean of taxable already-invested money waiting for a better service for their portfolios; and until this is addressed, I can’t say with any real conviction that Robo-Advisors are set to takeover the world or even build a sustainable fire. That statement simply lacks logic.
Put another way: assuming one robo firm wins ALL of that marketplace, $1.2 trillion, they would have the same amount of assets under management today as ONE of many firms on Wall Street.
But maybe if you’re an advisor, you are still scared… At that prospect — especially if all you are is a salesperson — but this isn’t actually what you should be scared of… you should be scared about the logic behind the next movement in robo-advising that no one is talking about today.
The roadmap to tapping this last vast (and once discovered, ultimate) ocean of taxable money is actually pretty simple, especially using logic. And this is where today’s financial advisors SHOULD be scared.
I’ve spent the better part of three years studying the internet of things… and I’ve also spent these last three months wiring up my house to be a smart house… it’s all very modular and early… lightbulbs, house alarm, sound system, cameras, My iPhone sharing my geolocation with all of these things…. and now, all of these devices and services are communicating with each other using another amazing platform I’ve been using called, “If This Then That…” or IFTTT for short.
Basically it’s a Logic Tree, to have internet-enabled apps, devices, and services talk to each other. For example, IF I turn on my web-enabled house alarm, THEN This Service will automatically tell my web-enabled Nest thermostat to turn off, turn on my webcams, and text my family that I’ve done this. IF one of my family members is on their way to the house, the thermostat will turn on, and turn off the alarm and let us know that person is now home. And, maybe magically, no one mindfully did anything to make this happen minute-to-minute. It all happened in the background, automatically.
Admittedly, the functions and recipes are pretty basic today, they are absolutely growing more and more robust everyday… and someday soon this platform, and its logic will become a much bigger part of all of our worlds… and THIS… this is where the financial world should be taking note (I am).
The basic value an advisor represents to a client today is ultimately a couple of things… knowledge and logic. If you are a client who is older, you need A amount of income, if you hold x amount in taxable money, and pay Y amount in taxes, and can only handle a C(ertain) amount of volatility, and H(ave) deferred gains of…. then age+A+X+Y+C+H = a recommendation based on the information an advisor knows about you, and their knowledge (or access to knowledge about the investments within a client’s portfolio).
Obviously no one has perfect information, but certainly algorithms constantly being updated with all of this information aren’t exactly dumb either… and they don’t forget, ever.
It will be some day in the future (maybe the near future), that an algorithm using a thoughtful intuitive user interface will be able to ask these same pointed questions (or gather these datapoint rather seamlessly), and then streamline and weight these factors to offer recommendations rather quickly and robustly, taxable or not– to hold for now, buy more, sell, or not. Tactical, active, buy and hold, or not — arguably a service like this wouldn’t have to be that myopic.
Granted we’ll need a huge dataset to also parse the universe of available investments, allowing to provide quantitive and qualitative assignments and comparisons… the likes of only a few have direct access to now (Morningstar, AdvisoryWorld, etc). But that being said, this logic, when it’s finally built and presented, will only get better, faster, stronger… and never need a day off. It will never need to be reminded of anything you’ve shared with it. Oh sure… It will still need humans, of course, but certainly not the 300,000 advisors servicing the community today.
And… If This Happens, Then That is what you should worry about…. and mark my words… it will happen; it’s simply too logical not to.