In the first part of our post, we discussed the pros and cons of the so-called “robo-advisor” that many are predicting as the future of financial advice. In today’s post, we’ll continue with my argument as to why that’s too simplistic.
Behavioral problems are one thing uniquely suited to human-to-human interaction, as we seem to be hard-wired to feel more accountable to other human beings than we do to a computer. It’s easy to just stop opening the statements showing your account balance or to stop logging into the website that shows you how badly your investments are doing; it’s a lot harder to blow off an established personal relationship with a human advisor serving as your accountability partner.
In fact, for years many advisors have suggested that their primary benefit is not designing quality portfolios, but helping clients stick with their portfolios and deal with the so-called “behavior gap,” the difference between the returns the investment markets deliver, and the returns investors actually earn after accounting for their potentially poorly timed decisions.
While it’s not clear how large the behavior gap is for all investors in the aggregate—although DALBAR has tried to measure the phenomenon for years, its results are highly sensitive to the point of comparison—it’s nonetheless clear that there is certainly at least some subset of investors who experience the problem. For those investors, who arguably are the ones who need the most help, and are most likely to seek out a human or robo-advisor for assistance, it’s just not clear whether a robo-advisor is enough. Can that advisor talk them off the ledge while they’re in the midst of panicking from a market decline, when there are no human beings to talk to at all? (I should point out that to their credit, several of the robo-advisors have now hired behaviorists to at least try to tackle the problem).
Similarly, it’s not clear whether robo-advisors will be able to keep investors from just chasing returns in a bull market. It’s also unclear whether the entire growth of robo-advisors in the first place is just investors chasing appealing short-term returns, as all of the robo-advisors have been established since the financial crisis and none has ever navigated a single bear market!.
Notwithstanding the importance of having human beings to engage other human beings in their behaviorally driven financial problems—in addition to the other wide range of tax, estate, insurance, retirement, and additional topics that comprehensive financial planners address—the reality is that while purely robot-driven solutions may not drive enough behavior change, purely human-driven solutions can be remarkably inefficient. That inefficiency leads to higher costs for consumers and makes financial advice unaffordable for many. While there are some things that humans do far better than computers, there are also many things that computers do far more efficiently than humans.