The Star Wars universe is filled with annoying robots; they are terrible workers, nervous, inattentive and sloppy.
There is a good reason behind that. For George Lucas, it seems these flawed robots were created as a plot device to justify armies of human clones. Ironically, he had to give his robots “human” qualities to justify increasing headcount.
Back in the real world, the finance industry is not sold on cloning its employees to tackle productivity. Far from it; robo-advisors are billed as replacements for armies of humans precisely because they lack the human traits Lucas artificially imposed upon robots. Robo-advisers are consistent, reliable and lower-cost support for the investment adviser business.
Yet our robo-advisers are also not what one would expect from robots. They lack the intelligence of a true automaton. “Robo” is a euphemism for “not human.” But it is not analogous with “smart.”
The limits of this approach can be seen in the categorization of clients. On the other side of the table are investors. Investors are very human and invest with all of the empathy and feeling with which humans are capable. That means they invest based upon sentiment, and change how they invest as trends change. Advisors need to reflect these trends, whether they be social responsibility, smart beta or simply index tracking.
For some robo-advisers that is a challenge. They typically take the input from the client and apply a box-ticking exercise to see which of the four or five risk buckets the client should be put into. A similar complexity can be found in many online trivia quizzes; this is triage, not decision-making.
Many firms will make the case that they are reducing the costs associated with providing advice effectively through using a basic service. As a short-term strategy that makes a difference. If every other firm is also lowering costs, getting expenditure in line with peers is vital. Over the longer term a firm needs to differentiate its service.
Getting plain vanilla advice from a cookie-cutter service will not make clients sing their adviser’s praises. Word-of-mouth is a strong marketing tool. It has gone global via social media. Bad advice will be reported on quickly, so the question is: how good can advice be to an individual, if it is one of only five options?
Underpinning the credibility of the service is the technology upon which it sits. Investment in off-the-shelf robo-advisory technology can undermine that credibility. A white-labelled service allows quick entry into a market but again, it is not a sustainable model for differentiating a firm. Where one wealth manager looks a lot like any other, they must compete on price. In addition, algorithms applied to the market have a shelf life. As observed in the early days of algorithmic trading, algorithmic investment strategies will require close management to avoid giving a stale result.
The key will be preparation. Any white-labelled service will need to have a plan for replacement over the longer-term. Off-the-shelf systems must be adapted to carry enough of a firm’s investment DNA that they can really differentiate service. The infrastructure underlying robo-advisory must also be prepared to support it with the right data; connectivity with the firm’s pricing engine and inputs that make its approach to investment unique.
It will also have to be flexible enough to allow the company to rapidly change, update and enhance its application of AI and machine learning. The logic and datasets used by the systems need to be maintained and refreshed; any undue cost and complexity will impede their use and frustrate the user.
In the real world, there are no excuses for building annoying robots. If robo-advice is the future, an adviser would do well to reflect the future in the service they offer.