In their quest to find clients, we see robo-advisors as being as disruptive to the financial services sector as Uber is being to public transport.
Uber is a great example of something that was made possible by the Internet. Without the Net, Uber simply could not be. And yet, the Internet alone did not change the world of taxis - Uber did that. The Internet was certainly a vital piece of communications infrastructure which allowed a world-changing thing to happen. But it's not the technology itself that is revolutionary today - it is how it connects people.
Currently, the debate is limited to how robo-advisors affect established players and, given their experience, capital, advertising and existing client bases, you can be assured that the established players will be at the table. Surprising new entrants may emerge in the robo-advice sector that may change the fundamental rules of the financial services sector. What if AARP (American Association of Retired Persons) entered the market with a branded white-label robo-adviser? What if Aldi or Lidl did too?
At the same time, we see and acknowledge a degree of resistance and backlash to robo-advisors. This is unsurprising, as, historically, all new technologies are viewed with some suspicion.
There are two critical questions that most people ask:
1. Are robo-advisors better tools than human advisers?
2. If so, will robo-advisors replace humans?
The answer to question one is that robo-advisors are very good at the limited functions they perform. Their lack of human fallibility almost guarantees them to be faster, more accurate and more consistent than you or me.
And so, to question two. Is today's advisor already on a countdown to oblivion? This is a compelling question and it is easy to fixate on it, particularly if your job is one that might be replaced.
Robo-advisors bring viable self-service to financial advice for the first time. Their advice will be low cost to deliver (although perhaps not low cost to market and promote), consistent, and make it easier to maintain meaningful conversations with customers about their money through highly effective automated communications.
As travel agents and bank tellers know, many people will self-serve when technology allows them to - and if enough people self-serve you can start replacing employees with machines. But making investments is different than buying air-tickets. A lot of people want the comfort that dealing with another person in a trusting relationship can deliver.
The second factor to recognize is the significance that robo-advisors are limited in function and scope. We still need people when things get outside the box.
There is not a robo in the world today that produces a meaningful answer to very complex financial situations. For example, there are no algorithms that we know of that address estate planning considerations across multiple family units using assets held in different trusts. It is going to take a person (and quite a skilled one at that) to address those issues using all the traditional tools in their financial adviser kit.
That is not to say that no jobs will be lost because of robo-advisers - there will be losses. Just as armies of clerks lost their jobs because Microsoft Excel was better at doing the mundane slog work than they were, robo-advisers will replace people in tasks that are process-driven and lend themselves to automation.
But, overall, we see advisor jobs as being at risk more at the margins - we don't see mass lay-offs of financial advisers to be replaced by robo-advisers. Jobs are evolving all the time - displacement, in our view, is not why robo-advisors really matter.
Meanwhile, people are simply too good at selling financial services to be dumped as a distribution channel. Face-to-face marketing will always have a place - but from what we see today we cannot anticipate how big that place will be in the future.
For large, existing, players in financial services, robo-advisors may be an opportunity to lower back-office and servicing costs or open up new distribution channels. They will have the enormous marketing spend required to generate leads and convert prospects into customers.
At the same time, that very same technology in the hands of a disruptive new-entrant could strike a deathblow to many established financial services firms. With robo-advisors, the competitive question might become 'Do you remember BlackRock and Schwab? They used to be in financial services back before Apple incorporated its robo-adviser into the operating system of the iPhone.'
Robo-advisors are quick and low cost to deploy, allowing anyone with a community to create and brand their own investment platform for that community - from a church, to a fishing club, to a popular blogger to Amazon. If you already have the followers, a robo-adviser will let you lead them off the traditional financial services grid.
That is where we see the threat to the existing industry players and the opportunity for the disrupters and new entrants. And that is why robo-advisors matter so much.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.