Is the title excessive? Maybe for an ordinary person off the street, it is over-the-top. For a retail-based financial adviser, the title still might feel like an understatement.
Over the past few decades, Americans have shown that they can be tempted by the low-cost, turnkey approach – even if it’s automatic and robotic - over the more-expensive, human-driven, customized approach. Stockbrokers were among the first casualties of the internet’s proliferation as low cost trading options through E-Trade, TD Ameritrade took market share away from traditional brick-and-mortar clearinghouses. Low-cost, index-based investments have been rapidly taking market share from active investment managers for the past decade.
Despite the commodification of the financial industry, the realm of advice and consulting – which still relied on information collection, synthesis, and analysis – was mostly untouched. Sure, there were robo-advisors, but not everybody trusted computer software to automate their decisions. Robo-advisers lacked the trust necessary to really take a bite out of the market, but that trust might be earned if there was a trusted brand behind it.
Last week, Vanguard launched its pilot program for robo-advisors – designed to shut out human financial consultants. Given the consistency of messaging between Vanguard’s low-cost investments and its new automated advice modeling software, this may be just the boost necessary to tip public consciousness over to the new regime. Of course, robo-advisers are not going to work out for everyone – real life is more complicated than what fits in a computer program – but life might get tougher for traditional financial advisors since the new system could take away a lot of the easy-lifting from their existing book of clients.