Productivity plateau ahead for robo-advisors

The low cost and convenience of digital platforms may not be able to overcome human advisors’ winning qualities

Productivity plateau ahead for robo-advisors

While robo-advisors enjoy a significant following and user base, particularly among retail investors, they may lose their advantage — or at least, be integrated into hybrid advice — weaknesses relative to human advisors become more evident.

“Robo-advisors came into existence only after the 2008 financial crisis, a fact that is often overlooked by advocates of this technology,” wrote PeachCap CEO David Miller for InsuranceNewsNet. Noting the bull run in the market that’s lasted just shy of 10 years, he argued that the quality of any advisor, human or not, depends on their advice in a bear market.

“All of this is not to say that robos cannot perform during a down market, but their abilities won’t be fully understood until they face one,” he said.

Another issue is robo-advisors’ inability to focus on emotions. The importance of emotional quotient (EQ) in investing has been rising among clients and advisories, who are realizing the need to manage one’s emotional state to ease through turbulent financial periods. Some financial apps can send out notifications to users who go beyond a certain spending limit, but Miller noted that robo-advisors are currently not sophisticated enough to help clients manage their emotional state every day.

The millennial preference for mobile rather than personal transactions may also be changing. Ahead of the tremendous transfer of wealth expected from baby boomers, Miller said millennials are realizing that no single app can deal with individual investment, tax, and estate planning needs. At the same time, he argued, DIY investors will rely more on advisories that can integrate more services under one roof and coach them to make better decisions on their own.

Finally, he said, there’s the democratization of the family office. Most investors, including many of those in the global cohort of new millionaires, have been unable to afford the exorbitant fees associated with retaining a family office; instead, they have had to hand their investments over to a mutual fund or robo-advisory service.

“But … family offices are recognizing that by integrating robo-advisory intelligence and technology, they can offer white-glove advisory services at a more affordable rate,” Miller said. With robo-advisors to leverage in areas like portfolio management automation and trade execution, they can have more time to provide human consultation and empathy when market turbulence happens or when a major decision has to be made.

“As human advisories integrate EQ into their services, and as the family office model becomes accessible, robo-advisors will supplement the work human advisors do, not replace it,” he said.