YOUR MONEY
Robo Advisors Have Arrived
But What About the Human Touch?
By Bill DeMarco
After years of development, robo advisors have entered the world of investment management. Still, many investors may not fully understand exactly what robos do or how they do it.
Robo advisors are automated investment platforms that use artificial intelligence (AI) and its algorithms to guide investors with little or no human interaction. For that reason, robo advisors cost less than traditional advisors, which is part of their appeal.
It’s too early to understand the potential risks of investing with robo advisors during an economic downturn or extreme market volatility when panicked or inexperienced investors may be more inclined to abandon their investment strategies without a familiar, actual person to guide them through the storm.
A financial professional can provide personalized, face-to-face guidance to clients as they accumulate wealth and their needs become more complex. Put simply, there are still some critical things that people can do better than computers.
- Get to know their clients
The true value of a financial professional may lie in emotional intelligence and interaction. When personal relationships are formed, advisors gain insight into each client’s unique financial picture, including their priorities, pressing concerns and psychological tendencies.
When challenges arise, a financial professional can step in to help clients overcome impulses and biases that could prevent them from achieving their objectives.
A robo advisor may not ask the right questions or gather enough information to accurately assess the investor’s needs and appetite for risk. An investor’s psychological risk tolerance can be difficult to assess. Some people who describe their personality a certain way on a questionnaire may act differently under real-life conditions.
- Offer more choices and comprehensive service
While robo advisors are cheaper than personal financial professors, their services are typically limited to portfolio management. Their reliance on ETFs and mutual funds means that investors may not have access to individual stocks and bonds or to alternative investments and strategies. A financial professional typically has a wider range of asset classes to choose from and may be able to build a broader investment portfolio—or a more focused one—depending on the client’s goals and risk profile.
Some financial professionals use a digital platform for investment management purposes. Even so, a full-service practice can help meet additional financial needs and provide customized advice that is much wider in scope. Recommendations might incorporate debt management, insurance protection, college funding, gifting, tax strategies, wealth transfer, Social Security claiming options, and retirement income planning.
- Provide accountability and perspective
What happens when an investor veers off track and isn’t making sufficient progress toward his or her stated financial goals? While it may be easy to ignore the recommendations of a robo advisor, it might be more difficult to disregard a trusted financial professional. The prospect of regular checkups with a real person who cares about a client’s future might inspire more realistic decisions about spending and saving.
A financial professional typically can keep clients better informed by discussing the financial issues that matter to them, which may help give them more confidence in their decisions.
Finally, one strength of a financial professional is the ability to listen and lend emotional support through life’s transitions, some of which may call for a shift in financial strategies. Having a dedicated person to call in difficult times could help ensure that short-term issues don’t derail an effective long-term strategy.
Of course, there is no guarantee that working with a financial professional will improve investment results. All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful.
As with any investment account, investors who use a robo advisor should understand the specific services that may or may not be included (such as rebalancing and tax-loss issues) and how and when these services will be performed. Investors should also be aware of costs associated with the services (including third parties).
