People generally know what they want, but very few know what they really need. As investment advisors, one of our foremost tasks is to identify what people really need, their goals, and provide appropriate advice accordingly. Good advice is the most important variable in our business, not cost or access.
As with other industries, technology has made inroads in the advisory and investment space as well. Algorithmic trading and robo-advisors have become buzzwords to attract clients while offering investment advice at low or zero cost with no human intervention.
Today, many apps/platforms offer quick sign-up, digital payments, a host of investment options like mutual funds, ETFs, even direct stocks and seamless execution. However, even as they have commoditised the process, good advice, in my view, is impossible to commoditise.
Imagine a first-time investor. She registers on one of these platforms. The sign-up is a breeze, the funds are transferred via UPI, and she is all set. But then she is bombarded with tens even hundreds of investment options/schemes. Typically, she will select an investment-based on a star rating or a large asset management company (AMC). On some platforms, there might even be a robo-advisor to help her decide. The investor has begun her journey where she is in control of her decisions. Ideal scenario, right? Wrong.
The apps/platforms may attract many new users, but the right metric is to figure out how much the users are investing through these platforms as a percentage of their net worth, and the general experience is that the share of wallet of these platforms remains low. The answer lies in simple human psychology and behaviour. Investment is as much emotional as it is logical. When we are investing our hard-earned money, we are just not comfortable sharing our fears and insecurities with a bot. More importantly, we need someone to blame or look for course correction when things go wrong.
According to a 2019 Wells Fargo/Gallup Investor and Retirement Optimism Index survey, covering 1,029 US adults with $10,000 or more invested in stocks, bonds or mutual funds, 84 per cent respondents said that financial advisors will always be needed and will not be replaced by automated investing technology.
The large digital wealth advisors like Wealthfront and Betterment have probably figured it now (after much experimentation and VC dollars) and are offering plans where there is a real person you can speak to.
No cookie cutter approach
My asset allocation and portfolio makes sense only to me, just like your portfolio will make sense only to you, it is individual and personal. There is no one-size-fits-all portfolio, because we all have different time horizons, risk factors, wants, needs and emotional triggers. Skilled advisors do not just know investments but also know their clients well enough to know what combination of investments will work for each person.
There is no doubt a section of investors who are passionately and personally involved with their investments on a regular basis and keep themselves well-informed about their investments and the market in general. Given their involvement and experience, they have a good sense of what works and what doesn’t. Such investors can most definitely utilise the robo/AI driven platforms with tweaks to suit their needs. However, this segment is a small minority. For most investors that are more involved in their day jobs or businesses and have little time or interest in learning about businesses and market history, good advice is imperative.
1) While the platforms and robos can expand the market and bring in new investors, serious money will always seek good advice. While technology can be an enabler and drive down costs it cannot replace an intuitive, context-driven advice.
2) Technology is an equaliser. There is no first mover advantage. Everyone will offer it sooner or later.
3) Investment platforms or robo advisors will find it hard to make any money for themselves. The pricing is too low – some are free – and unless they scale up – which is not easy, thanks to competition – they’ll have a hard time becoming profitable. Even the largest platforms in the US like Betterment with more than $10 billion AUM are yet to make profits.
4) Clients will always pay a fair price for trust, integrity, hand-holding and competent advice.
Technology will and has disrupted fees, access and information asymmetry for sure but not good advice.
Advice – good advice – will always remain a high touch business, and only if you understand your clients, their needs and psychology, can you give them good advice.