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Cerulli: Don’t Fear the FAANG Robo

Ironically, the desire for human advice is one of the biggest roadblocks keeping companies like Facebook, Amazon, Apple, Netflix and Google out of the robo space, according to a new Cerulli report.

Online retailer Overstock.com announced earlier this year that it was launching a digital advice platform, and just last month Amazon was reportedly looking at offering checking accounts to its customers, prompting industry folks to question whether a robo advice offering is next.

The wealth management industry has had a longstanding fear—that large consumer brands such as Facebook, Amazon, Apple, Netflix and Google (FAANG) will disrupt the financial services industry. These companies have well-known brand names and a significant amount of data on their millions of users who, the argument goes, could be funneled into an online investment platform.

But a new report from Cerulli Associates casts doubt on the disruption of these companies in the digital advice market. Ironically, Cerulli finds that one of the biggest barriers to entry for the FAANG companies into the robo advisor space is the need for a human advice element.

Even digital advice users frequently prefer discussion with human advisors, Cerulli says.

“Prospective digital platform investors may not want or need the quarterly face-to-face portfolio reviews expected in previous iterations of traditional advisory practices, but they still largely prefer the empathy and trust that comes with personal interaction,” the report said.

Scott Smith, director at Cerulli, said it’s difficult for a digital advice provider to scale that in a meaningful way. Even the largest firms in the space that are growing fast, such as Schwab and Vanguard, are struggling to find enough Certified Financial Planners to serve their customer bases.  

“Trying to get them on the scale you would need to make an impact at an Amazon or an Apple would just be insane,” he said.

There’s also a necessary level of quality control that doesn’t come with the traditional customer service roles these companies are used to.

“There needs to be a level of sophistication and familiarity that I would think would be tough to scale into the thousands for a firm that’s starting from scratch,” Smith added.

In Cerulli’s survey, investors cited transparency as the most important factor in choosing a financial advisor.

“Comfort, familiarity and trust, I think, are still largely reliant on a human connection for most of the target market with wealth,” Smith said.

Some robo advisors are hoping millennials won’t want that. But Smith believes once they accumulate significant assets, they’ll want someone to at least validate their opinions.

“That’s what we saw with the launch of the Schwab platform; they said, ‘We can just do this with no human support; Intelligent Portfolios is going to do it for us,’” Smith said. “And it wasn’t even a year later they announced Intelligent Advisory, realizing these people, they want to do most of it themselves but still want a validator at the end of it.”

Smith also believes the declining margins in the robo advice space will deter these companies from jumping in. Only 12 percent of all households indicate that they’re current or likely users of robo advisors, the report found.

The operational and reputational risks are also high.

“You look at something like Cambridge Analytica and Facebook—that goes sideways and they’re taking a beating in the markets and their reputation. You get involved with people’s money and go a little outside the lines, and you give an opportunity for getting criticized for just about everything.”

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