No matter how dire some predictions are for small financial advisory firms, clients still prefer to trust humans rather than machines or software, which is likely to keep an important role for the human advisor.
This personal relationship, which is marked by trust in the advisor, differs from the relationship between a person and technology – though advisors will still need to rely on tech to advise their clients.
“Technology by itself cannot create trust,” Robert C. Merton, a Nobel laureate in economics now teaching at MIT, recently told ThinkAdvisor. “The successful advisor must have the trust of their clients.”
When it comes to trust, he offers an illustrative example from the field of medicine. If someone asked an advice app on a cellphone what to do about a painful knee, and the app answers “cut it off” – you would not follow that advice.
“We do not know the motivation behind the advice. Is it in our interests or someone else’s? We do not know the validity of the model used to reach the conclusion of the advice given. It could be a very flawed model. And we do not [know] the data that were used in the model to reach the conclusion. It could be poor, incomplete or biased data and it may have been transcribed incorrectly,” Merton said.
There is a related issue of transparency. “Financial advice, like medical advice, is inherently opaque, meaning that it cannot be made transparent enough to avoid having to rely on trust,” he added.
Given the importance of trust in the advisor-client relationship, Merton recommends financial advisors (the breathing kind) should:
- Check what they are doing to retain and enhance trust with their clients.
- Make sure the business model being used supports the creation of trust.
- Take advantage of technology to improve/enhance what the advisor does.
- Do not view technology as a “competitor or substitute” for the advisor.
- Understand and assess the financial technology they employ to certify trusting its use in client solutions.
Moreover, Luis A. Aguilar, a former Securities and Exchange (SEC) commissioner now on the board of Envestnet and on the Board of Advisors of Personal Capital, suggests comparing relationships when evaluating trust. “A personal relationship with another human is the best way to build an enduring trust relationship,” he said. “I doubt that a machine will really care about my future and my family’s future.”
But a somewhat differing view comes from Vasant Dhar, a professor at New York University’s Stern School of Business.
“Technology can surely create trust on its own in transporting us if our collective experience is that it rarely makes mistakes and doesn’t kill us. We’re not there yet,” he said. “But in the world of investing, which is fraught with uncertainty and unpredictability, trust is indeed a lot harder to engender, but not impossible.”
“At the moment, robo-advisors do little more than portfolio optimization; that is, given your positions, they tell you how to size them,” he explained. “This is an easy enough task, and most people would probably trust the machine with this simple task.”
However, trust “is harder to create when a machine makes recommendations, like ‘buy Google’ without the basis for such a recommendation,” Dhar said.