The investment advisory landscape is ever-evolving, but there is a particular change underfoot that is really shaking things up. Unless you are a millennial, the idea of an algorithm managing your portfolio may seem peculiar. But the advent of the “robo-advisor” is upon us, and it is here to stay. The question for wealthy investors is: Can an algorithm replace my advisor?

The evolution of this trend is reminiscent of the 1990s, when discount brokers emerged as a threat to the full-service stockbroker. If someone can execute a trade for $8, why would that investor continue to pay a broker $800 for the same transaction? Back then, brokers were shaking in their loafers, worried that they would have to struggle to justify their commissions and that their clients would no longer value their expert advice.

Yet, today, the advisory business is as strong as ever, although it looks vastly different. The survivors of the transition to the discount platform—Schwab, Fidelity and TD Ameritrade—are also three of the biggest custodians of advisor-managed assets.

What resulted is a two-pronged service model, with distinct services for “do-it-yourself” investors and for financial advisors servicing the wealthy. This was a sea change for the industry, and it has aided both the investor and advisor in many ways.

Today, just a few years into the emergence of the robo-advisor, the impact might be very similar. In the end, we will likely be left with a few successful robo-firms that provide distinct services to individuals and advisors. Robos are simply firms that provide automated investment services and a high-tech user interface to investors for a low cost.

The industry is just emerging, but with much momentum. The robo-offerings all differ, but what is common among them is this: Customers complete an online questionnaire that helps determine their risk profile; then a computer algorithm determines an appropriate asset allocation, which it implements using low-cost exchange traded funds. The computer program automatically rebalances the portfolio and may harvest tax losses if the account is large enough to warrant this additional service.

So, the $64 million question is this: Will the robo replace the advisor? Highly doubtful. The robos will, however, change the investment advisory landscape in ways that will benefit investors and advisors alike. For the emerging investor, robos offer an opportunity to invest in a diversified portfolio for little cost or effort. For the advisors, the benefit is simple—increased technology.

A good financial advisor with expertise in investment management and a deep knowledge of his or her clients’ financial planning needs rarely has the skills or the time to develop software. As such, most advisory firms lack the client-friendly tools that many of the robos offer.

But, advisors can take advantage of the robo technology and make it available to their clientele, all while continuing to provide their extremely important advice. There is also potential for the robo platform to create efficiencies for advisors, freeing them up to spend more time addressing clients’ most complex financial issues. Wealthy investors need an advisor who can manage unique and complex financial issues and also coordinate with other advisors, like accountants and attorneys. This is simply not something an algorithm can handle.

In fact, while some of the robos may tout their teams of financial planners standing by to take your call, consider that the line of callers ahead of you may be especially long if and when the markets are in turmoil. Life is complicated when you accumulate wealth and, lacking sophisticated, individualized financial advice could cost you dearly.

Filed under: Winter 2016

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