Rumors Of Robo Advisors Deaths Are Greatly Exaggerated

Editors note: Bo Lu is the founder of FutureAdvisor.

Shane Leonard recently wrote a doomsday post on this site about robo advisors, whose rapid growth has made the behemoths of finance take notice.

Now that robo advisorshave shown theres a market for low-cost, online investment management, Leonard predicts that the industrys incumbents will copy robos technology and offer similar services at little to no cost, essentially wiping out their nascent rivals.

While that has happened in sectors like online banking, a close look at wealth management shows Leonard is wrong for three reasons: incumbents are slow to start because digital financial advice cannibalizes their existing businesses; they face deep conflicts of interest as advisors; and not enough human experts exist for them to serve middle-class families, where robos dominate.

Leonard cites two examples: One is Charles Schwab, the discount broker and asset custodian, which said last July that it would offer online investment management for free sometime this year. Another example is Vanguard, which came out with its Personal Advisor Service last year, and plans to make human financial advisors available for inexpensive webcam consultations.

Schwab and Vanguard are both great companies, but several structural issues prevent them from competing effectively.

Lets take Schwab: It mooted its free robo-advisory service in July. Three months later, it formally announced the same service. Seven months later, no service.

Every day that Schwab doesnt launch demonstrates the disadvantage large companies have competing against startups in the short-term. Its not the product or engineering ability that slows them down, but the dissonance within an organization acting against its own interests.

Creating a great robo-advisory service undercuts human advisors. That puts incumbents like Schwab at odds with the human advisors who custody assets with them (if those advisors leave, Schwab loses money). So incumbents must manage an internal conflict, and Schwabs strategy will need all the careful attention of their very smart CEO, Walt Bettinger. Theyre walking a very fine line.

In the short run, Schwab is trying to sidestep the conflict by announcing direct-to-consumer robo advice and a re-brandable version for human advisors. That could work. Early disruptive products are always worse than the incumbents by some measures. But as the disruptive product improves and closes the gap between low-priced robo advice and human solutions, a company providing both will be more and more at odds with itself.

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Rumors Of Robo Advisors Deaths Are Greatly Exaggerated