Roboadvisors Mix in Human Interaction

One of the lessons that Star Wars taught us was that even robots — recall C3PO — carried with them traits that made them human-like.

So it should come as no surprise that Internet-based investment algorithms, or “roboadvisors,” are similarly laced with human interaction.

In fact, a surprising number of these advisories offer investors the chance to talk to a human being at the other end of the line to either service or advise clients, according to the December edition of “The Cerulli Edge.”

“There is a misconception that digital advice means no human interaction between the customer and the firms delivering the advice,” said Tom O’Shea, associate director at Cerulli Associates in Boston.

A purely robotic advisory relationship is a myth and nearly all roboadvisors offer clients access to a representative over the telephone, or over the Web in the form of text and video chat, the report also said.

“Roboadvisors are not as scary as people make them out to be,” said GJ King, president of RIA in a Box, an Ohio-based service to help advisors launch their own registered investment advisory companies.

At the end of the day, people simply want service and even robots — and most assuredly humans — come in all shapes, sizes and voice intonations.

That means companies slapped with the roboadvisor moniker offer a variety of options through infused with human advice to a greater or lesser degree. “Digital advice firms exist along a spectrum,” Cerulli’s report notes.

At one end, the advisor Weathfront, with an estimated $2.5 billion under management at the end of the second quarter, funnels clients through a Web-based before clients become customers, according to the Cerulli report.

At the other end, consumers find advisories such as Personal Capital, with $1.5 billion in assets under management, which provides advice through a representative, Cerulli said.

The industry’s more recognizable names — Vanguard and Schwab — operate at the more personal end of the roboadvisor spectrum. The two giants commanded an estimated 53.6 percent market share of the $18.6 billion in digitally managed assets among 13 companies listed in the Cerulli study, as of the end of June.

Not surprisingly, the bulk of the industry operates somewhere in the middle and it is worth noting that human intervention is responsible for boosting customer satisfaction rates by 15 percentage points, the Cerulli report also noted.

Even among Internet-based algorithms, there’s no dearth of variety in the asset allocation models executed by the roboadvisors, and the variety of asset classes selected by the algorithms make the robots decidedly — well — human.

One roboadvisor called Hedgeable, for example, allocates 2 percent of a person’s portfolio to currencies and 14 percent to commodities, while Schwab allocates only 5 percent of the portfolio to gold and precious metals, according to Cerulli’s analysis.

Most of the other advisors within the group of 13 cited by Cerulli allocate a portion of a portfolio real estate, but not Hedgeable and Betterment. Still other roboadvisors split allocations among differently weighted indexes.

An examination of the asset allocation model for a hypothetical 27-year-old investment for retirement in 2015 among seven roboadvisors found the allocation to equities ranging from 60 percent (Schwab) to 90.1 percent (Betterment), Cerulli found.

“The concept of automated advice is clearly not deterministic,” Cerulli’s researchers wrote. “Digital advice providers construct algorithms that generate different portfolios given—approximately—the same set of inputs for risk scoring.”

Roboadvisors have been flooding into the advice market over the past decade and traditional advisors have taken note, wondering if they might one day succumb to the ruthless machines so prized by the Evil Empire.

Firms delivering Internet-based investment algorithms appeal to younger investors in particular because roboadvisors don’t charge as much as traditional advisors.

Because roboadvisors rely heavily on technology, they appeal to millennials who interact with financial institutions through smartphones and tablets. This group will likely be drawn even further into the clutches of Internet-based algorithms.

While surveys note the increasing asset volumes under management collected by roboadvisors as years go by, many industry analysts point to a hybrid model as showing the most long-term promise.

As today’s millennials age, accumulate wealth and one day inherit still more assets from their parents, the need for financial planning and specialty tax and estate planning services is one traditional advisors are best at filling.

This makes today’s millennial tomorrow’s wealthy “baby boomer,” and a prime candidate to transition out of Internet algorithms.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].