The big argument made by human advisors against robo-advisors is that they don’t make allowances for investor psychology; more succinctly, they’ve never been through a market downturn and don’t have the ability to talk clients down from the cliff.
“This is the traditional advisors' time to shine,” said Aaron Klein, co-founder of Riskalyze, which offers tools for investors to gauge risk tolerance. “The reality is that clients need their behavioral coaching.
“Robo-advisors have not done a good job of preparing their clients for this type of market, and they tend to brag about the low number of service professionals for every client they have.”
Many full-service advisors recognized that the markets were due for a correction and made adjustments to client portfolios to benefit from this latest downturn. For example, Toronto advisor Greg Hall rebalanced his clients earlier this summer so that they were sitting in cash with some holding as much as 50% liquid currency.
The robo-advisor clearly can’t do that. However, they’ll argue that’s not what they’re meant to do. Passive means passive.
“Wealthfront clients are predisposed to the fact that markets go up and markets go down,” writes the founder of the rob-advisor, Adam Nash, in an emailed statement. “We make sure to communicate with them along the way whether via email or on social media to reinforce long-term passive investing and ensure they have a clear understanding of what that strategy means.”
So where do both stand when it comes to this latest correction?
"What I think is really happening is a lot of clients are parallel opening a robo portfolio while keeping money with their existing advisers,” said Joe Duran, CEO of United Capital, a registered investment advisor with $15 billion. "If people make it through a big decline and don't do anything silly with a robo, then the obvious question they'll ask their adviser is 'What am I paying you for?'"
Now is the time for advisors to answer that question – and that’s a good thing.