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March 22, 2017 at 12:41 AM
Over the past five years, robo-advisors that provide algorithm-based financial advice and online portfolio management have skyrocketed in popularity. A variety of voices across the financial services industry have been quick to proclaim that the sky is falling as the disruptive influence of these robotic adviseors will lead to the end of the traditional advisory model. Once the robots take over, the argument goes, humans will be no more.
While there’s no disputing that the burgeoning popularity of robo-advisors will have a transformative effect on the advisory business, it’s a bit of an over-reaction, in our view, to sound the death knell for the traditional financial advisor. Yes, digital alternatives will democratize access to advice, lower cost and provide product transparency that is long overdue, but financial advisors have an important role to play in creating a holistic wealth management experience that addresses the totality of investor needs. There is no substitute for the human touch.
In fact, at the end of January, robo-advising firm Betterment announced it was adding a human advisory option to their offering. However, many robo-advising models treat wealth management as a “one-time discussion” type of engagement – determine client priorities, set the asset allocation, wind up the clock, and you’re off to the races. But this type of financial plan is static, while life is fluid and ever changing. Parents get sick, jobs are lost, markets crash, the client needs a lump sum distribution . . . Life happens.
A commoditized approach to investing cannot incorporate potentially high-impact life events in the same way a knowledgeable human advisor can. Humans offer expertise throughout the life cycle of a client’s investments, while a robo-advisor often reduces a client to a formula. Moreover, the human advisor offers another invaluable service that the robo-advisor can’t replicate – emotional intelligence.
The human adviser understands that each client’s financial picture is a unique construct, and each client has an individual response to financial issues. Only a human advisor can help navigate the behavioral impulses and cognitive biases that can derail a strategy and prevent the client from achieving his or her objectives. Just as doctors are reminded in the Hippocratic Oath that they do not treat a fever chart or a cancerous growth but a sick human being, financial advice must also remain humanized and take a holistic approach.
We believe that the convergence between robo-advising and traditional advisory will only accelerate. In the end, investors want the comfort of expert, human advice combined with slick new technologically enabled tools. Betterment CEO Jon Stein (a CFA), even emphasized that the company added human advisors at the behest of clients. Throughout the industry, most other firms are offering some element of human advice as well.
Industry research supports our view. The Financial Planning Association and Investopedia found that investors want a low cost, automated platform combined with personal advice from a human adviseor. Moreover, they noted that 40% of the investors surveyed revealed they are very uncomfortable with automated investing during periods of extreme market volatility.
