Robomania's Robust Rise

Thanksgiving in the northeastern United States always means a few things: apple and/or pumpkin pie (I'll take both), watching football with high school friends (and increasingly, with them and their children), and at Waters, planning for the upcoming year.

Sure, we still have our major year-end conference in New York and end-user awards to give out, and we always look forward to those. But as we look toward those final weeks of December, it also gets us thinking about the year to come.

When 2015 is wrapped, there won't be a lack of trendy topics that took this year by storm to memorialize — regulation receded a little bit as a priority, and in its place came blockchain and cyber, M&A, 'sexy' fintech ventures and micro-consortial utilities.

But on the buy side, I will admit I think we've approached one trend and its potential consequences with a bit more caution than perhaps we should have: robo-advisors.

Now, for a publication that draws a bright line at retail and financial advisor tech, this is understandable. In general, if you see a TV commercial for something — and I'll leave the expertise on TV spots to my colleague Dan DeFrancesco, who has an unusual fascination with them — that means it's outside our coverage area.

See, for example, this sleek, HAL-inspired ad for Charles Schwab's robo. If it can appeal to that many people, it's probably not for the Waters crowd.

Positives and Negatives

But the whole thing fascinates me just the same. On one side there's the positive: almost every major brokerage house — the likes of Fidelity and BlackRock included — has either built, bought or partnered with a robo-advisor platform this year.

Some of these, like the Schwab example previously mentioned, are built only to automatically rebalance portfolios on a limited set of criteria, and do little more; they're designed to serve you and me.

But others have been designed to be far more robust, targeting the high-net worth (HNW) and mass affluent segments. Some are even aiming to replace or augment registered investment advisors (RIAs). They're beginning to sniff our space. Most of these were developed independently before being bought up, and it's little wonder that many successful RIA teams are spinning off on their own.

Then there's the negative. Even if the industry has gotten better at 'right-sizing' this technology for different purposes, it's still relatively unclear whether the raw logic underneath can successfully cope with massive market shifts, like the correction we saw in August when hedge funds and proprietary traders reportedly laid waste to many of them.

One can only imagine their potential suffering once rates finally begin to rise.

Wider Effects

What's interesting for us at Waters isn't necessarily the tech by itself, so much as what the rise in robos says about large-scale asset management going forward.

True, perhaps some innovations will come out of this from a portfolio management perspective, leveraging new cognitive science-backed or machine-learning applications that might not have cropped up otherwise.

But the the bigger thing is a signal: that sprawling, institutional firms are looking at this model and throwing serious money at it.

What could that mean? Well, knowledge transfer for one. The automation and workflow that is built around robos could be transferred to a range of other areas far, far away from retail brokerage. A more passive or incremental approach from robos could also serve to moderate more active or hybrid management strategies currently popular as well — again, if they're proven to be effective under duress.

We should all admit that just like financial advisory, institutional asset management isn't always the most tech-forward activity. Sure, some trading desks — like JPMorgan's US equities operation — are highly sophisticated by necessity, but a large chunk of any trillion-dollar-plus operation is still done in the middle office, manually or semi-manually, with an army of Broadridge-type providers and outsourcers in tow.

Digitization initiatives, like the one thrust into its second phase this week at State Street, are one way they're responding to this reality on an enterprise level. Robust investment in robos could simply be that same type of approach manifesting on the product side.

Or it could be that all these giants moved at once, simply for fear of missing out. Maybe I'm reading more into it than there is.

Requesting Opinions

Either way, this will be an area to watch for us in 2016, if not for its direct technology consequences for institutional investment than for the way it influences the major investment houses' way of thinking going forward.

If you have a strong view on the subject, I'd be very interested to hear it. Drop me a note at timothy.murray@incisivemedia.com.

In the meantime, for those of you stateside, enjoy the holiday.