Artificial intelligence (AI) is getting a lot of attention these days. While Google, Microsoft, and Facebook are investing heavily in this space, Elon Musk (of SpaceX and Tesla fame) warned that AI is our “greatest existential threat.” Some might wonder if Musk has taken his cue from movies such as The Terminator or The Matrix, but, surprisingly, Bill Gates and Stephen Hawking have voiced similar concerns. Hawking justified his reasoning by explaining that “humans, limited by slow biological evolution, couldn’t compete and would be superseded by AI.”

These tech juggernauts may be more alarmed by the military applications of AI, but financial advisors should also heed these warnings, as some of them are already under attack from so-called robo-advisors, or providers of online portfolio management with little human intervention. These platforms were relatively new in 2014, when The Analyst first published an article on them. Their ascent has certainly been astonishing since then, and they’ve proven to be quite effective and resilient relative to their flesh-and-bone counterparts.

There are several interesting developments in this space. The first has been their proliferation in Canada, where at least eight start-ups have sprung up within the last two years with their own robo-advisory services. Some of these include Wealthsimple, ModernAdvisor, and Nest Wealth. Two others, WealthBar and RoboAdvisors+, also offer financial planning in addition to investment management. Other platforms also differentiate themselves by offering features such as tax-loss harvesting, periodic rebalancing, and access to a human advisor.

Irrespective of what makes traditional advisors different from robo-advisors, the underlying investment philosophy of robo-advisors is essentially the same. They provide access to a passively managed, diversified portfolio with investments that track specific indices. A new user fills out a standardized questionnaire to determine his or her risk tolerance, which would, in turn, determine an asset allocation. Most of these platforms invest the funds exclusively in ETFs, but some of them also offer mutual funds or pooled funds. Tracking indices with ETFs helps drive down the management fees—ranging from 0.15 percent to 0.55 percent of assets under management—that these platforms charge.

Second, as robo-advisors continue to amass more assets, some of the traditional incumbents are now competing directly with these start-ups. BMO’s SmartFolio and Questrade’s Portfolio IQ platforms, for instance, are capitalizing on the appeal of these robo-advisory services and their existing client base to get ahead of their toddler competitors. South of the border, Vanguard and Charles Schwab—the largest traditional advisory platforms—now dominate the robo-advisory space with assets under management that dwarf those managed by Silicon Valley start-ups. Power Financial, a large diversified holding company, recently invested in Wealthsimple in Canada and Personal Capital in the U.S., another sign of institutional interest in this space.

Strengthening their defences, some robo-advisors are coming up with creative ways to fuel their growth and compete for market share against their larger rivals. Canada’s Wealthsimple and Betterment in the U.S. now offer an advisor version of their platforms. In other words, flesh-and-bone advisors are now able to leverage the computational advantage of robo-advisors to service their clients and focus on what they do best: bringing in new clients and managing relationships. This division of labour is bringing some harmony to the otherwise somewhat tense relationship between human advisors and robo-advisors, at least as far as passive management is concerned.

Robo-advisors have not yet ventured into active management; their focus so far has been to lower management fees by tracking broad indices rather than generating alpha for their clients. They rely heavily on the low cost and diversification benefits of ETFs and standardized risk profiles to segment their clients. In reality, they don’t have a lot of intelligence built in; they simply follow a set of hard-coded rules for making investment decisions. They’ve not yet reached the level of sophistication of some of the models used by those engaged in high-frequency algorithmic trading, et al., some of which rely heavily on AI.

But that doesn’t mean robo-advisors will never be able to add AI to their arsenal. With the entry of larger institutions, an increase in assets under management, and increasing investments in technology, it’s likely that today’s robo-advisors will gradually get smarter and introduce new capabilities in order to continue growing their market share. As they continue down their evolutionary path, the use of AI becomes a vivid possibility.

When, and to what extent, that actually happens is anyone’s guess. But the rise of robo-advisors does raise some interesting questions. As these platforms mature, what role will traditional advisors play? Will robo-advisors be able to establish a competitive advantage in passive management as low-cost service providers, driving human advisors out of that business? Could ETFs end up attracting more assets than the actual constituents on which they’re based, and could that potentially end up artificially inflating the value of those constituents?

There’s also the possibility that robo-advisors could eventually venture into active management and start offering total return mandates. That would come with its own set of challenges and implications for financial markets, and would certainly intensify the struggle between human and machine. Regardless of which direction robo-advisors are headed, a dynamic evolution of our industry is guaranteed. The war for assets under management is well under way, with both sides gaining ground in different battles. Hopefully, the war will yield a net benefit to investors, even if robo-advisors don’t attain the might of the Terminator.