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Robo-Advisors: Disrupting Financial Services

Explore the rise of robo-advisors and their impact on the financial industry. Discover the vulnerabilities, available technology, and legacy rigidities being challenged. Learn about the integration of financial planning with investing and the potential for automation.

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Robo-Advisors: Disrupting Financial Services

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  1. Jarrod Wilcox ROBO-ADVISORS:FINANCIAL DISRUPTORSQWAFAFEWMARCH 15, 2016

  2. DISRUPTORS YOU HAVE WATCHED • Newspapers vs. Craigslist • Booksellers, retailers, malls vs. Amazon • Taxis vs. Uber

  3. INVESTING: VULNERABLE • PAIN POINTS • Expert customized service too expensive for most • Can’t judge quality until too late • AVAILABLE TECHNOLOGY • Inexpensive Internet delivery • Low barriers to modeling high quality decisions • LEGACY RIGIDITIES • Large organizations too conflicted to adapt easily

  4. BARBARIANS AT THE GATE • SEARCHING FOR BUSINESS MODEL • Mint (sold) • Learnvest (sold) • Future Advisors (sold) • Wealthfront • Betterment • Personal Capital • PROTECTING BUSINESS MODEL • Schwab • Vanguard • BlackRock • Fidelity

  5. STILL EARLY INNINGS, BUT… Now

  6. FAST-IMPROVING TECHNOLOGY • Data aggregators (walled gardens breaking down) • Better decision modeling & optimization tools • Financial planning opening up • Low-cost, scalable websites • Mobile Internet service delivery • Blockchain and crowd-sourcing for “illiquid” transactions

  7. INTEGRATING FINANCIAL PLANNING WITH INVESTING: THE DISCRETIONARY WEALTH FRAMEWORK

  8. FINANCIAL PLANNING: TIME SHIFTING

  9. GOALS & CASH FLOW PLANNING

  10. THE BIG PICTURE

  11. REALISTIC RISK SIMULATION

  12. AFTER-GOVERNMENT RETURN POTENTIAL • LOW END (now) • IRA, 401(k) training and reinforcement • Social Security advice • MIDDLE TIER (now) • After-tax portfolio optimization • Optimal asset location in IRAs, 401(k)s • Tax loss harvesting • Optimal withdrawal • HIGH END (beginning) • Estate planning

  13. SIMPLIFIED INVESTING • Risk allocation ~ • 1) Expected risk premium (after-tax), divided by… • 2) Variance (after-tax) * 3) Leverage on discretionary wealth. • Get right discretionary wealth and effective tax rate. • How many securities would meet most people’s needs? • 2 to 6 for index ETF’s. • Much less than for active management.

  14. RETAIL INVESTING STRATEGIES POTENTIALLY AUTOMATED • Focus on simplicity • 2 to 6 passive ETFs • Recourse to changing discretionary wealth • Investing • Spending • Match tail exposure & investor leverage • Add feature funds • Social concerns • Psychological matching • Individual securities • Maximize loss harvesting potential • Complementary funds • Allocate to annuities & insurance

  15. PARTNERSHIPS MAY DOMINATE Many people will value human empathy and coaching, as well as ability to handle exceptions to pre-conceived models.

  16. PREDICTIONS • “Robo-adviser” market share growth will accelerate: • Improvements with experience • Exponential word of mouth contagion • Does not depend on true artificial intelligence. • Human/automated partnerships will capture most of the early potential market. • Human service skills will migrate toward more financial planning and coaching. • Market share for active investment management will shrink where it does not add comparable value.

  17. WHAT TO REMEMBER • Integrating financial planning with investment management offers new opportunities for professional knowledge delivery. • Its automation is a disruptive tsunami, coming because it offers greater value added at lower cost than conventional narrow investment management. • The discretionary wealth framework can help.

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