Self-driving cars, automated assembly lines, roombas(!), robo-advisors…where will it all end? I actually saw a national news story this week about robotic pets. Robot dogs to be precise. Talk about a responsibility-free relationship! (Don’t you wish everyone had an on/off switch?)
If you read trade journals in our world you would think that automated or digital investment advice is everywhere. If you are an advisor, you probably feel as I do: nobody is asking me about this…nobody. But of course, automation is a part of progress and job displacement is as American as apple pie. Circa 1800, farmers made up just under 90% of the U.S. labor force; by 1900, it was just under 40%; today farmers make up less than 3% of the labor force. Similar situations have occurred in various U.S. manufacturing industries such as textiles and steel. And in service industries, kiosks and iPads are displacing wait staff and cashiers. There are some (alarmists) that think technology will displace a huge percentage of the labor force in coming years and that we should write legislation to protect jobs. While I disagree with this approach, it’s a bigger economic question than what I write about in this blog. Let’s stick to investment advice for now.
In the ‘90’s the prevailing wisdom was that real estate agents and their 7% commissions were going to be displaced by the internet. List your house online, and pay 2% rather than 6% when you sell. Well how did that work out? On the other hand, travel agents for the most part are about as rare as a Trump rally in Berkeley (See what I did there? Equal opportunity offender.). Most of us book our own trips online now so what gives? Let’s delve a little deeper: first of all, real estate agents embraced the web and leveraged it to aid them in selling homes. This is by any definition, a big ticket item – in many cases buying a home is the single largest purchase most people make in their lifetime. Whereas a vacation might cost anywhere from $1000 - $10,000 and doesn’t compare to the commitment of home ownership. Thus people are understandably more comfortable interfacing directly with technology to book a trip as opposed to buying a home. Given this framework, it’s reasonable to conclude that making financial decisions that will impact the rest of your life can be daunting and therefore, investing big dollars based on a web site’s brief “risk” questionnaire might be terrifying for many.
There are also those who feel that digital advice hasn’t really been tested by a significant market down turn yet…a crash. It will be interesting to see how investors that use these digital platforms react to a scary market event. Of course, I have witnessed too many human advisors panic right along with their clients during market crashes so…there’s that.
In the end, digital advice is a disruptive technology and in my experience, these are good things in any industry. Certainly for consumers and in the long run, for workers too. In the short run, workers can be displaced and these stories can be tough. Society (and the individual) must create opportunities for those that are displaced to retrain for new careers. But these technologies lower costs for consumers and help to deliver many goods and services more efficiently. In my industry, asset allocation modeling is being commoditized to a large extent. The future of financial advice is in the second word: advice. Advice can really only come from the advisor being fully informed and that can really only come from comprehensive planning, something also benefiting greatly from leaps in technology! Perhaps one day artificial intelligence (AI) will indeed be able to counsel investors above and beyond simple asset allocation but that day isn’t here now. Experience, sound judgment, rigorous planning, and being an educator continue to be the best avenues to help investors achieve peace of mind.