Morningstar Magazine - June/July 2017 - 51

Automated Advice Gets Personal
No longer will robos be
relegated to solving only the
simplest problems.

ROBOS

Mike Barad

Futurist Arthur C. Clarke said, "New ideas
pass through three periods: 1) It can't be done.
2) It probably can be done, but it's not
worth doing. 3) I knew it was a good idea all
along!" Automated investment advice, or
robo-advice, may be passing through Clarke's
stages of acceptance. The question isn't
really whether robo-advice can be done; it's
whether it can be as good as a human advisor.
Your answer to that question is, "It can't,"
right? Silly human.

strategies with emotionless precision.
But financial advisors do so much more than
investment execution for their clients. One of the
greatest values an advisor offers is that of a
personal guide, balancing out a client's behavioral
biases to stay on the path to achieving financial
goals. My aim here is not to show how roboadvisors are better or worse than human advisors,
but rather to provide a vision for how automated advice will become far more tailored and
valuable to investors.
Let's explore some of the elements of successful
investing toward achieving financial well-being.
The Big Picture

Asking a machine to do something as well as
a human, in this context, doesn't mean expecting
it to perform the actions in the same way
with the same result. I think you'll agree that
machines do some things better than
humans (such as complex calculations) and that
humans do some things better than machines
(such as showing empathy).
Investing in the traditional sense-putting money
to work using a financial scheme to earn a
profit-can certainly be done better by machines.
After all, the majority of stock trading in U.S.
markets is now done by algorithmic high-frequency
trading. Virtu Financial VIRT makes millions
of electronic trades each day and lost money on
only one trading day in five years.1 So, we know
that machines can be programmed with
investment strategies and can execute on those

Financial advice is best formed in proper context.
By using account-aggregation services,
advice will be informed on "held-away" assets
and liabilities for the entire household.
Too often, human or machine has limited
information to act upon. The problem is trust and
control. A human advisor only has perfect
knowledge over the assets he or she is managing
for a client, a limited view into any assets
collected as part of forming a financial plan, and
no knowledge of large pools of assets and
liabilities that the client simply doesn't care
to disclose.
The average investor probably has a retirement
account at his or her place of employment,
a house, and a host of loans/credit debt to pay off
that an advisor might know little about.

The totality of these assets and liabilities that are
"held away" from what advisors manage is
large. ByAllAccounts co-founder James Carney
says that "over half of a typical advisor's
clients have held-away assets, which could
represent between 20% and 40% of an investor's
total portfolio." I know in my own case, it
is even higher. Advisors are crippled by limited
information disclosed by clients.
Today's robo-advisors often have very little
knowledge of users' broader financial situations.
Often, investors' first encounter with a robo is
testing out the service with just a small investment.
While human advisors may not have a
complete picture of their clients' finances, they
certainly know clients better than a robo
does, especially if they've completed and continue
to refine a financial plan.
But "can it be done?" That is, can a robo start
to know an investor? I don't think we are
far off. Let's take account-aggregation services
as a good building block. Morningstar's
ByAllAccounts service is one of the largest
aggregators robo-advisors could connect to, with
a network that includes data from more than
1,400 advisory firms and 15,000 financial
institutions. Users provide aggregators access
to their bank, credit, and investment
accounts, allowing them to quickly pull together
a full picture of financial health. Aside
from the huge benefit of avoiding manual entry
and error for all this info, the aggregator
can stay connected and continually monitor
changing data.
Unlike a static financial plan that must be
updated manually, account-aggregation services
can be built into a robo-advisor to automatically feed in user data and monitor financial
health, across the entire household. Human
advisors should leverage aggregation services
too, and some are doing just that today.
Human advisors may be ahead of robo-advisors
in knowing their client, but a robo integrated
with account aggregation is a powerful use
of technology.

1 "Virtu Never Loses (Well, Almost Never)," Bloomberg Markets, Aug. 10, 2016.

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