Robo Platforms Are Missing Personality

In the last couple of years, Robo investment platforms have taken an important position in serving the middle and lower markets for financial planning. They are here to stay and should be encouraged. The question is does the Robo model for investments in its current format completely work? Like many new innovations, the problems are somewhat hidden when the markets are hidden. Where the Robo platform is completely stand-alone and totally independent of direct advisor input then the risks increase.

Then, also let’s consider what do investors want? Gallup research shows only 9% of investors want a completely automated service, and this is mainly the younger investor. Therefore, 91% of investors want some human input in their financial planning. Refer to the following research :

The issue I see emerging for Robo platforms is that when there is a sharp and/or sustained correction downwards then there could be a mass exodus with a bloodbath of losses. After all, behavioral finance research shows us, people will, in varying degrees, make emotional decisions at the wrong time and follow the herd out of the market. Yes, the Robo platform may have many clients, but they will not be able to communicate with them when negative events happen. Similarly, there is no incentive for the Robo platform to communicate with investors as the market keeps going up and many get out of their comfort zone. In fact, the Robo is incentivized to keep having these people sign-up.

Overall, the structural problem for Robo platforms, as they currently stand, is that they do not know enough of the in-depth financial personality of the investor. The investor is served in a “one-size fits all” way based on a set of algorithms which have no relationship to who they are. The downsides are the Robo Platform does not know:

How to communicate with each investor on their unique terms. Put another way, they do not know how to re-frame information so that it is understandable to the investor.

The behavioral biases of each investor which will drive their decision-making (for instance to name a few, loss aversion, following the herd, taking a consolidated view, over trading).

The correct risk profile which will influence portfolio allocation. Some of the Robo’s have a few questions that relate to risk and others make potentially false assumptions based on demographic data. Not all Millennial’s and Gen Y’s with a high income are risk-takers.

The Robo platform would be greatly strengthened if it had a validated financial personality discovery process incorporated into it. The ROI would be significant in the following areas:

The ability to customize communications from the first point of engagement in the sign-up process. This would not help the initial sign-up process but also ongoing marketing.

Enhance the capability to manage investor emotions in volatile markets.

Provide a more robust framework for making suitable recommendations to meet compliance requirements and also monitor them.

Ultimately, a Robo investment platform will not be sustainable on a long-term basis if there are no mechanisms to “Know, Engage, and Grow” the investor clients. This means that there must be robust online solutions to discover the client’s financial personality and a place for human interaction. These elements can be incorporated on a cost-effective basis and to achieve scalability which is needed to bring financial planning to the masses in a safer way.