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Financial Planning > Behavioral Finance

Humans to Robos: You Can't Touch This

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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.

MyPrivateBanking estimates that hybrid human/automated solutions will accumulate AUM of nearly $3.7 trillion by 2020, and $16.3 trillion (slightly more than 10% of all investable wealth) by 2025. They estimate that pure robo-advisors will have a market share of only 1.6% of total investable wealth by 2025. 

The magnitude of convergence between robo-advising and human advice varies depending on investor demographics. Millennials are some of the most enthusiastic users of robo-advisors, since they’ve grown up in a culture of technology. They also tend to be skeptical when it comes to the value of financial advice. Confident in their own ability to manage their money, they prefer a more independent approach. Moreover, they do not yet have the level of investable assets that would merit the attention of a financial adviser. Robo-advisors, which offer much lower fees than the 1% of AUM typically charged by traditional financial advisors, are a popular choice for smaller investors. Some firms allow clients to get started with as little as $100.

While robo-investing involves a significant level of substitution at the lower end of the market, where more commoditized solutions are more attractive, it has its place at the high end as well. Baby Boomers nearing retirement have demonstrated considerable interest, with nearly half of Schwab’s Intelligent Portfolio clients over 50.

(See Will Schwab’s New Hybrid Platform Steal Clients From Schwab RIAs?).

In the high-net-worth segment, interest in robo-advisors is also growing as clients believe that automated investment models can augment the bespoke solutions that their financial advisors tailor for them. 

In our view, sophisticated wealth management solutions continue to offer significant value that cannot be replicated by robots. The view that wealth management can be commoditized assures a “race to the bottom” that will ultimately do all clients a disservice. The true value of human advisors lies in the ability to support and advise their clients as they experience significant life events.

There is no doubt the wealth management industry should certainly feel challenged to integrate digital solutions and feature sets or risk being disintermediated. But no commoditized option will ever be able to offer clients the level of care, flexibility or personalized solutions that a qualified and properly trained wealth manager can.


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