The topic of ‘robo advice’ is becoming increasingly active in financial circles. There is no agreed definition of what robo advice, or ‘robo’ for short, is though. For some, robo is simply an on-line or app-based interface for communicating generic investment concepts, perhaps alongside participant-specific snapshots of account positions and balances. For others, participant-specific advice is delivered through these digital interfaces. Some services provide bespoke investment management services, rather than advice, through such interfaces. A clear understanding of what is being delivered is key to assessing the relevance/desirability of the robo approach in question.
Differentiating between the various elements of the robo approach is, to my mind, a helpful starting point. There are at least three potential parts to such an approach:
- The communication/servicing element is the easiest to isolate. Clients can choose whether to interact with a human or a machine interface (of various descriptions). The latter falls into the robo domain;
- The analysis and resulting decision-making elements are present in both advisory and bespoke investment management relationships. A systematic approach to these elements might be considered as robo, whether carried out in an automated fashion or manually subject to a defined process. A more intuitive/gut-feel/subjective approach would not be robo; and
- The implementation element, if offered, is distinct from the analysis and decision-making element. The former follows on from the latter. A robo service will seamlessly implement the decisions taken. The non-robo version involves manual intervention in the implementation phase.
Much of the emphasis to date seems to have been on the communication/servicing element. Robo does offer a means of lowering the cost of servicing individual clients, particularly those with small amounts of assets to service. The digital nature of the service, and associated audit trail, helps to limit the operational risk too. Those clients that want the human touch can opt for a service where this aspect remains present, albeit with the attaching costs and constraints around availability.
The absence of a human interacting with the client does not necessarily negatively impact the analysis and resulting decision-making process. If anything, these elements are potentially the greatest beneficiaries (of a robo influence) out of the three parts. A systematic analysis and decision-making process (based on codification of human cognitive processes) results in consistent decisions over time, free from distortions that a more ‘free-style’ approach might introduce (perhaps due to moods, fatigue or other influences). Systematic decision-making processes are already common in the investment world, being successfully applied by managers such as Bridgewater, AQR and Dimensional. Systematic approaches are highly scalable too, in contrast to capacity constrained human processes. A systematic/robo analysis and decision-making process need not necessarily be communicated to the client via a robo interface – advisors might combine a human communication front-end with an automated analysis and decision-making back-end.
Automation of the implementation phase serves to reduce operational risk and likely increase efficiency. Such automation might not, however, be possible if the underlying investments, and associated control processes, do not support this approach.
We are in the early stages of the robo revolution in financial planning and investment management. Automation offers great opportunities to enhance existing approaches as well as introduce new approaches (disclosure – I’m building a business to offer a new approach, enabled by automation). Providers will benefit from identifying where automation can improve their processes/services and implement accordingly. Clients should be clear as to what of the services they are buying are systematic and what contain a human element. This disclosure will enable informed purchase decisions to be made, meaningful assessments of value to be determined and comfort with the purchase decision to be achieved. Making a decision off the back of an undefined catch-phrase might well result in disappointment. Will you be thanking a machine, enjoying the support of a human or some combination thereof in the future?