Why robo investing & advisors won't take over yet
By Aaron Reber
Digital advice is a hot topic in the financial industry. The convenience of achieving your life’s financial goals without human intervention and at a reduced fee is appealing, yet there are fundamental questions that still need to be answered.
Will digital advice stand the test of changing market cycles? Can digital advisers predict events and help clients pivot during life-changing moments? Just how far can digital advice extend? Can it replace the role of an adviser? How about replacing the role of trustee?
At this point, digital advice does not completely solve for humans exercising discretion, an essential component of achieving desired outcomes for clients. For example, human advice is needed to manage life-changing moments, illiquid assets and business or family governance issues. It also is a critical element of serving as trustee and making decisions that are in the best interest of beneficiaries.
Consider all the fiduciary responsibilities of a trustee: safeguarding assets, making investment decisions, complying with applicable laws, ensuring appropriate distributions, communicating with beneficiaries, preparing trust accountings and handling tax matters. Can we expect that technology will perform these fiduciary functions in the future?
Here’s a real-life scenario: A mother of two sets up a trust for her children. The mother dies unexpectedly, and the trustee is required to hold the assets in trust until each child reaches age 35. In the meantime, the trust instrument allows the trustee to make distributions for health, education, maintenance and support. If one child presents a college tuition bill to the trustee for payment, it’s likely a no-brainer for the trustee to pay it. The other child, however, is in need for transportation for work and requests that the trustee purchase a luxury car with funds from the trust. Now what?
Today, a trustee evaluates beneficiary requests using expertise, experience and well-established discretionary distribution processes. Among other factors, the trustee analyzes the assets of the trust, income produced from those assets and the impact that making the distribution would have on achieving the intended purpose of the trust. Is the luxury car in the budget? Would a less expensive car be a better outcome to achieve the ultimate objective of the trust? The trustee weighs the facts and circumstances of each request and then exercises discretion to make a decision.
Only humans exercising discretion can account for circumstances like these, and that is why clients hire trustees. It is hard to imagine a future with a “robo trustee” making such a decision. Can we expect future technology to supplement trustees’ discretionary decision-making processes by analyzing inputs against a multitude of financial scenarios to help better predict the outcome? Absolutely. How about analyzing thousands of similar fact patterns against a database of past decisions to illustrate a prudent outcome? That would be great. In the end, technology will help trustees better perform their responsibilities. It just doesn’t seem likely that technology will replace humans exercising discretion — at least not for now.