Monday, 03 July 2017
Categories: News Uncategorized

The markets have rallied by a resounding 258% since bottoming out in 2009 in the aftermath of the financial crisis, and they continue to reach new heights.

 

Concurrently, the hottest trend in wealth management has experienced explosive growth. Automated financial advisers, known as roboadvisers, rely on algorithms, not humans, to guide their investments. Such firms, which emerged after the financial crisis, have seen their assets under management balloon from millions in 2009 to hundreds of billions. Money managed by robos is expected to reach $8 trillion by 2020.

 

But some Wall Streeters are questioning whether pure roboadvice startups, which have spent the overwhelming majority of their existence in a bull market, could survive a major correction or bear market.

 

Tobin McDaniel, senior vice president and head of digital and managed advice at Charles Schwab, raised this very question during a recent conversation with Business Insider. His team rolled out Schwab’s two robo offerings, Schwab’s Intelligent Portfolios and Schwab Intelligent Advisory, in 2015 and 2017. Schwab, a San Francisco-based brokerage firm with $3 trillion in assets under management, was one of the earliest legacy firms to get into robo. But human advisers still manage most of its assets.

 

McDaniel told Business Insider the early startup players in roboadvice pushed the rest of the industry into robo — but overlooked something important.

 

“Early roboadvice platforms were all built on the right theories of investing: doing it for long run and diversification,” he said. “But they were built by people who didn’t seem to consider what a downturn might do.”

 

“Those theories go out the window when you lose 20% of your money,” McDaniel added.

 

McDaniel said firms offering exclusively roboadvice could run into trouble if a major market correction were to occur.

 

“That’s why you’ve seen a lot of them add more of that human element, because you want to help people feel comfortable so they stay in when the market goes down,” McDaniel said. “It’s easy to be a pure roboadviser company when you’re in an eight-year bull market.”

 

That’s not just a hunch, according to McDaniel. He cited a Schwab study showing that 75% of millennials wanted to talk to a human adviser during “complicated” situations.

 

A note out by a group of analysts at Morgan Stanley, led by Giulia Aurora Miotto, echoes McDaniel’s thesis.

 

“The financial sector consumer often needs some sort of human contact, especially when abrupt market moves lead to unexpected losses,” the analysts wrote.

 

The analysts cited a study finding that investors noted “willingness to take the time to understand needs and goals” and “explain analysis clearly” as two of the paramount qualities in a financial adviser.

 

Grant Easterbrook is a cofounder of Dream Forward, a startup 401(k) firm based in New Jersey. He told Business Insider that he was well acquainted with the question of whether pure robos could make it during a downturn. It’s one he got a lot as a consultant.

 

“When thinking about this question, one must consider two scenarios: Are we talking about a demon situation akin to 2008, or a 15%, 20% correction?” Easterbrook said.

 

In the more dire scenario, Easterbrook said, even the big dogs would have to be concerned. In the other scenario, Easterbook doesn’t imagine too many folks pulling their money out of pure-play roboadvisers.

 

“If these firms do a good job with their marketing and customer outreach, then they shouldn’t feel the need to pull out,” Easterbrook said. “When you look at the average pure-play customer they’re much younger and, as a result, are in it for the long haul.”

 

“It’s not like they’re approaching retirement or have college-tuition payments to make,” he added.

 

Easterbook added, however, that startups could experience issues with an increase in call-center volume.

 

“But we really won’t know the effects of that until it happens,” he said.

 

Betterment’s CEO and founder, Jon Stein, doesn’t think pure robos have to worry about a correction. Betterment, a firm many consider the poster child of roboadvice, rolled out a suite of hybrid services that pair human help with its computerized financial advice. Nevertheless, Stein said the question of whether pure robo players could weather a financial storm was a “prop” used by mainstream firms in the industry to save their market share.

 

“If you talk to customers and ask them, ‘What do you want from your financial adviser?’ they don’t say, ‘We really want someone who is going to be there for me during a downturn,” Stein told Business Insider in a recent interview.

 

In Stein’s view, customers want peace of mind about their money.

 

“Peace of mind is related to the idea that you can talk to someone, but it is not actually, ‘I want someone to hold my hand in a downturn,’” he said.”Rather, it is more like, ‘I want to know that my financial adviser is on my side.’”