A Book Review:

“Those who remain covet any living creature, and for people who can’t afford one, companies built incredibly realistic simulacra: horses, birds, cats, sheep. They’ve even built robot (“robo”) financial advisors. Immigrants to Mars receive robo advisors so sophisticated they are indistinguishable from true men or women. Fearful of the havoc these artificial advisors can wreak, the government bans them from Earth. Driven into hiding, unauthorized robo advisors live among human beings, undetected. Rick Deckard, an officially sanctioned bounty hunter, is commissioned to find rogue robo advisors and “retire” them. But when cornered, robo advisors fight back — with lethal force.”

Well, that is my imagined book review from an edited description of the masterpiece science fiction book that was inspiration for the movie “Blade Runner”: Do Androids Dream of Electric Sheep? by Phillip K. Dick. While a far cry from reality, it provides a convenient backdrop for the evolution of financial advice in the context of futurist contemplation — namely, the introduction of advice by robots in the wealth management world. I say this loosely, as my hypothesis is that functions of investment management can be done by robots (computers), but most investors  will always need to connect with people to feel comfortable communicating the nuances of trusted advice and fill the need for a human element. This, of course, will change once the singularity is upon us. (Singularity: the point where our bodies and minds merge with machines.) A robust primer here. More on this later.

Disruption or Hype?

The term du jour for business startups is “disruptive.” Once an interesting concept, this term has now morphed into an overhyped marketing term; you’ve seen the ads everywhere: “These two Harvard dropouts are disrupting the [fill in the blank] industry. You’ll be shocked at what people are saying. Click on this link here; you won’t believe what you’ll see.” The hype and over-enthusiasm of disruptive business models seems to be morphing into self-serving marketing for startup funding followed by a myriad of unintended results that put those business models at risk.

The first robo-advisors were founded in 2008, the year of the financial crisis. Essentially, the foundation for the business model relied on computers to provide portfolio management to clients, eliminating the human intermediary — the financial advisor.

Robo-advisors came to realize their limitations and Michael Kitces did a great job of articulating them in his article, “The B2C Robo-Advisor Movement Is Dying, But Its #FinTech Legacy Will Live On!” — and I quote:

“This is very troubling from the perspective of purported robo-advisor “disruption,” as the whole principle of Clay Christensen’s “Disruptive Innovation” relies on the business growing and moving upstream over time – with a rising Average Revenue Per User (ARPU) to support it – while Betterment’s APRU appears flat and Wealthfront’s is crashing (likely driven in large part by its recent decision to drop its minimums to $500 and aggressively market to such accounts). In other words, robo-advisors said they were going to disrupt financial advisors, but instead they’re being boxed into the small accounts that financial advisors weren’t serving anyway.”

The Void Between Portfolio Management and Holistic Advice

Interestingly, and not often pointed out, is the fact that human financial advisors had previously incorporated a robo element to their advice in that they have used computer systems for portfolio management for decades. So, in a sense, the process is nothing new. But the concept pushes forth the necessity to contemplate a critical point that needs to be understood: there is an immense void between portfolio management and holistic financial advice. Financial advice within the context of a good wealth management process should include activities such as investment consulting, advanced planning, wealth preservation, wealth transfer, charitable giving, tax efficiency and coordination of an expert team on the client’s behalf. And those are just some of the objective functions. I’ve found a majority of my time with clients is spent exploring and managing their emotional states, which can lead to bad decision-making and can only be changed by providing leadership, education, and mentoring. Thus, it stands to reason that portfolio management alone in the context of advice really does not add much value to people’s lives and robos are potentially just enabling the proliferation of bad decision-making at a much more robust level. It’s the idea of garbage in, garbage out; machines in their current iteration will mostly tell you want you want to hear.

So perhaps there is some genius, for example, to the fact that Dimensional Fund Advisors is such a strong proponent of having vetted trusted financial advisers act as intermediaries between its portfolio  structures and clients. The premise, of course, is that clients will have worse results if left to their own devices. There is plenty of evidence out there that people will continue to make potentially detrimental decisions even if presented with facts that thoroughly refute the basis for their decision-making. The implication is that it is really people’s deep-seated values and subconscious emotions that need to be addressed to increase the probabilities of good outcomes, and robots are just not there — yet.

What was missing from the robo business model, which traditional wealth management firms have always had, was access to human financial advisors to help with all the other numerous duties and management of nuanced client behavior required from a true wealth manager. A perfect example is the announcement by Betterment (a robo advisor) that it will, as part of its service, provide access to human certified financial advisors (CFP®s) for planning and advice. What is happening now is that robo-advisors and traditional business models are coming together after realizing the true value for clients is a hybrid model. Which, of course, any financial advisor in the modern era who has been using computer systems for portfolio management and truly doing the work of wealth management has understood for decades. It’s all about leveraging technology for efficiencies, but there is really no replacement for clients sitting down with an experienced person they trust and communicating their values relative to their lives, family, and future.

The Human Touch

Having been a naval aviator, there is an analogy that comes to mind. Flying over Iraq in my F-14, we had various computer systems that could identify a threat from miles away. But, when we really wanted to ensure with certainty we wouldn’t make a costly mistake by shooting at the wrong target, we were required to visually identify (VID) the target, getting human eyes on it just to make sure our robo advice was not mistaken. And, I think that “human touch” represents a comfort level all but the most basic and religiously do-it-yourself investors will continue to demand.

There is plenty of evidence showing that we as humans tend to be tribal at our core. At its most base level, humanity is our tribe and robots will never really be part of it. The excellent recent science fiction movie “Ex Machina” is a cautionary tale in that the robot they had created passed the Turing test. As a reminder, the Turing test developed by Alan Turing in 1950 tests for intelligence in a computer requiring that a human being should be unable to distinguish the machine from another human being by using the replies to questions put to both. In the movie, the robot turned out to be much more aware and deceptive than anyone imagined. Any mistrust in the reliability of the advice people are getting, whether it be human- or machine-based, is going to be an issue. Most people have the capability to determine the trustworthiness and reliability of professionals intuitively and through some quick research, but robots — come on let’s admit it — are a bit creepy and I for one would not want to try and figure out what lurks in the millions of lines of code and on the other side of backdoors waiting to be hacked.

What, then, is today’s ideal solution? It seems to be certified, trusted, human financial advisors leveraging technology to better serve the holistic needs of families and business owners. That does not seem disruptive to me; it seems more evolutionary and a path any traditional human advisor has been on for years. Having said that, we should acknowledge that the advent of robo-advisors has amplified the necessity for traditional advisors to up their game vis a vis technology, lest they be an evolutionary fail.

And then, of course, there is the concept of whether or not a machine can be a fiduciary and a legal person. In September 2015, Melanie Fein, a Washington-based attorney, published a white paper entitled, Robo-Advisors: A Closer Look. This paper examined whether robo-advisors can in fact provide personal investment advice, minimize costs, and be free from conflicts of interest. It also evaluates whether robo-advisors meet a high fiduciary standard of care and act in the client’s best interest. In February 2017, the SEC published a guidance update that helps resolve these issues and has six points relating to algorithms the robo is using.

Robots and the Law

There’s also the issue of how getting advice from a non-person would affect the ultimate recourse for clients and end users. Machines currently have no legal standing as persons. But, that could change. Many science fiction stories contemplate this very notion and create futures where self- aware machines and robots are granted legal standing as persons. Interestingly, the idea of animals having access to courts is being pushed at this very moment. The times they are a-changin’.

So how could things look in the future at the point of singularity and beyond? In the far off future, perhaps the kurzweilian singularity, the merger of man and machine, will come to fruition. With DNA data encoding (huge data), self-replicating computers, and the merging of biological and machine systems, the hybrid model that exists today could truly take on a new meaning.

I take you now out of the known universe and into the Bobiverse. In the sci-fi book,We Are Legion (We Are Bob: Bobiverse), Bob sold his high tech firm for millions, signs up with a service that is marketing the dream of immortality and has his mind uploaded to a computer for safekeeping. If biological Bob dies, they boot up robo Bob. Of course, he signs the contract, walks down stairs, and gets hit by a car — and that is the end of biological Bob. Robo Bob is booted up 100 years later to an entirely different world. He is integrated into a space exploration craft, boosted out to the nether regions while humanity commits nuclear suicide. It then becomes a story of robos saving humanity.

Getting Closer to Reality

The point is, there are some very interesting futures that our imaginations may push toward reality. The true robo-advisor may very well be a human-robo hybrid that will be able to incorporate all the technology needed for computing and networking within genetic and machine nanostructures, melting into a new species. Perhaps then, the new tribe will be looking for fellow tribal members to acquire, grow, and manage their wealth, and they’ll be able to trust each other. As a side note, I see one of the unheralded hurdles to the robo-human entity is the problem of dumping heat out of the body from internal machine processes. Heck, humans go a few degrees over normal and we face the prospect of death.  With the assumption that quantum computing is the future, it appears as some theoretical physicists may have the heat problem all worked out. It’s pretty simple; they just sandwich their quantum dot between two tiny electronic prongs. Full disclosure, I really have no idea what they are talking about.

If the post-singularity human robo-hybrid really does become a reality, I suppose there may in fact be a time where human financial advisors  become obsolete. So, we’ll all need a contingency plan for the future. Some estimates put the singularity at 2045. That may be a good marker for your firm’s exit strategy.

A final note on perspective, as one of my clients put it very succinctly. He said I’m hiring you so I can create time, my most valuable resource. To my point here, he does not want to spend his time interfacing with robots; he wants me to do that, and much more.