The Independent Market Observer

Robo-Advice and the Future of the Financial Industry

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jun 17, 2016 2:58:41 PM

and tagged Commentary

Leave a comment

robo-adviceThe rise of automated financial advice—essentially, computer programs that rebalance your accounts—has been a hot topic in the investment industry. Blockchain technology, which could automate many functions now handled by securities exchanges, is another one. Just this morning, a colleague sent me an article about a start-up that looks to make transferring money essentially free, undercutting PayPal, which is already undercutting banks.

Sounds like a revolution on the way.

I have friends investing or working in many such businesses, and I’ve had the chance to sit down with several start-ups looking to do similar things. So I can see both sides of the picture. There are real value propositions here, but in many respects, this trend is neither new nor particularly revolutionary.

Rather, this is just the next step in the ongoing drive toward greater efficiency. Finance can be broken down into three different businesses, which I broadly label as operational, expertise, and trust, each of which offers radically different opportunities for disruption.

Plenty of room for operational disruption

Let’s start with the operational aspects of the business, which are indeed ripe for disruptive disintermediation. PayPal was the first to the punch here, and it succeeded in many ways. Uphold, the company I mentioned earlier, is now attempting to do to PayPal what PayPal did to the banks.

Closer to home, look at Vanguard, which has been getting more efficient and cutting costs for decades. You could argue that this isn't the same as the newer tech-focused companies, but I would disagree. At core, both are making operational improvements that reduce costs to the benefit of users and, of course, the companies’ bottom lines.

Operationally, there are clear and continued opportunities for increased efficiency. But for many companies, operational improvements make their business models harder to justify. If a big part of your value is how efficient you are, then the spread of efficiency erodes your edge. The other two components of the investment business (expertise and trust) may be less susceptible to technology-driven erosion—a fact that points to how companies can continue to add value.

The limitations of robo-advice

Robo-brokers can work very well in a mechanical sense, potentially reducing operational costs. In difficult market environments, though, can they really provide the expertise and trust that a troubled investor needs?

I’m not sure. I do know that the previous iteration of this idea, exemplified by the E*TRADE baby encouraging people to do their own investing, came of age in the dot-com boom and disappeared shortly thereafter, when markets got more challenging. Much of the value added by a real live financial advisor comes from that trusted relationship and the advisor’s ability to coach the client through difficult times.

From an investor perspective, of course, the question is how to get the best of both worlds. From a company perspective, the question is how to best deliver that mix to clients.

This is what we constantly strive for at Commonwealth, and the result, in my opinion, is positive for everyone. We spend a ton of money on exactly the kind of operational improvements that reduce costs and improve efficiency. At the same time, the company and our advisors keep working to maintain our edge in the trust and expertise components. The results, in client surveys and awards, speak for themselves.

Trust and expertise: the most valuable differentiators

As technology continues to evolve, efficiency and low costs will be taken for granted, and companies will have to distinguish themselves on trust and expertise. The companies that stand to benefit most from today's tech trends will be those that can offer all of those things.

It’s also worth considering that many tech-driven companies tend to take root in supportive financial environments but do less well when things get tougher. PayPal, after all, has not replaced banks. Indeed, as an operational enabler, it is susceptible to exactly the same kind of disruption it originally brought to the party. Ultimately, as technology continues to improve, fees will be driven to essentially zero. Value will be in trust and expertise.  

I would argue that it has always made sense to choose partners on the basis of trust and expertise, rather than cost. Increasingly, we will be able to take low cost as a given, and that should be good for everyone. 

Subscribe via Email

Crash-Test Investing
New call-to-action

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®