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The Irony of Robo Advisors

Ciaran Rogers | April 7

“Robots will do us in...the singularity is upon us.” Phrases like that are a common response to an industry’s mechanization. While the singularity is not going happen (at least according to astrophysicist Neil Degrasse Tyson), the response exposes a deep human insecurity. In many ways, machines are better than humans: emotionless, hyper-focused, lightening quick, and don’t need lunch. It’s that promise of superiority that sparked the growth of Robo Advisors.

Early pioneers in the Robo Advisor industry built considerable companies on this alleged “superiority.” After some initial successes, big firms happily jumped on the robo advising bandwagon. As recently as February 2016, the Wall Street Journal asked, "Can robo advisors replace human financial advisors?" The irony here is that it’s the machines that need the human help to survive, not the other way around.

The Robos Missing Link

Despite the current pressure, it’s important to note that pure play Robo Advisors do fill a particular need in the market. They are perfect for buy and hold, self-directed, investors who only need simple activity like rebalancing and basic tax loss harvesting. The problem for the Robo business is that there are fewer of those types of investors than anticipated, and they are expensive to acquire.

Growth in assets under management (AUM) for pure play Robo Advisors is leveling out, while the human advisor/robo advisor hybrid is on the rise.(Source: Kitces) As many of the financial advisors we work with say, “Good luck calling a robot when your portfolio goes sideways.” Those advisors identify a fundamental flaw in the robo model: the lack of human interaction. But it goes deeper than relationship management. An excellent financial advisor understands the idiosyncratic nature of their client’s needs and employs that knowledge to craft the right investment plan. It is an understanding forged by years of intimate, personal interaction, something a pure-play Robo Advisor could never provide.

Humans+Technology FTW

When an advisor employs StratiFi’s services, they set themselves up for the best of both worlds. The advisor can do what he/she does best, namely understanding their clients’ needs and developing the appropriate investment plan to achieve them. Meanwhile, StratiFi does what we do best: using options to manage risk. Our machines, under the watchful eyes of our trading team, are working away, optimizing positions, working to minimize risk, and lower volatility, while simultaneously handling all of the accounting, reporting, and all the other non-revenue producing tasks that machines are so good at.

As for proof, look no further than the success of the hybrid approach: advisors that effectively deploy technology platforms like StratiFi have 40% more AUM, on average, than their Luddite counterparts.(Source: CNBC) If you’d like to see how StratiFi’s technology can plug into your practice please visit here to schedule a demo.

To learn more about the truth behind asset correlations and volatility, click here for our complimentary eBook "The Five Myths that Put Portfolios at Risk: Revealing the truth and improving investment outcomes using options."