Robo-advisors can do things that their human counterparts can’t, but they are not perfect either
Robos are gaining ground in the financial services industry.
Also commonly known as automated investment advisors and digital advice platforms, robo-advisors exist to provide automated, algorithm-driven financial planning services with little to no human supervision. Typically, they collect information from clients about their financial situation and future goals through an online survey and then use the data to offer advice and/or automatically invest client assets.
Betterment, the first robo-advisor, was launched in 2008 – the year of the Great Recession. Its initial purpose was to rebalance assets within target-date funds as a way for investors to manage passive, buy-and-hold investments through a simple online interface, according to Investopedia. However, after a decade of development, robo-advisors are now capable of handling much more sophisticated tasks like tax-loss harvesting, investment selection and retirement planning.
Why do investors choose robos over humans?
One of the main reasons, according to fintech start-up QARA, is that robo-advisors are not swayed by emotions. As they strictly adhere to the algorithms that they are programmed with, they can make the right decisions without riding the emotional waves of the market trends.
There are only a few market-savvy investors who can navigate such stormy waters successfully, which is why for the average investor, it may be best to rely on the historical data of how people reacted in the past. This is exactly what robo-advisors do, and they do this much faster and more efficiently than human advisors. Rather than relying on arbitrary predictions and analyses of how people will respond, robo-advisors analyze years of data and provide investors with recommendations of how they should respond.
Robo-advisors are also low-cost alternatives to traditional advisors, offering the same services at a fraction of the cost. Most robo-advisors charge an annual flat fee of 0.2% to 0.5% of a client’s total account balance – a lot cheaper than the typical rate of 1% to 2% charged by a human advisor (potentially more for commission-based accounts).
Robo-advisors are also more accessible than their human counterparts. They are available 24/7, and it takes less capital to get started as the minimum assets required to register for an account are typically only hundreds to thousands. Betterment, for instance, has no account minimum at all, according to Investopedia.
Why do investors choose humans over robos?
There are reasons the financial world has not completely embraced robo-advisors. The biggest reason, according to QARA, seems to coincide with that of why the financial world has started to embrace them: lack of emotions. Investing is more than numbers. Losses can take a huge toll on investors’ emotional health, while gains can inflate their ego to an unhealthy size. When going through this emotional rollercoaster, it may be beneficial for them to have someone they can talk to.
While robo-advisors are personalized and customizable with regards to the investor’s financial goals and risk preferences, they do not have the empathy, support, and humanity that human advisors have.
Robo-advisors are also not equipped to deal with unexpected crises or extraordinary situations. For example, if a young person’s parents died and he/she receives an inheritance, going to a robo-advisor to manage the money is probably not the best decision, according to Investopedia.
Furthermore, they operate on the assumption that clients have defined goals and a clear understanding of their financial circumstances, to begin with. That may not be the case for some.
What if investors want both robos and humans?
A study conducted by Investopedia and the Financial Planning Association found that consumers prefer a combination of human and technological guidance, especially during tough times. Many respondents (40%) said that they would not be comfortable using an automated investing platform during extreme market volatility.
The practice of bringing together the best of both robo- and human advisory is known as bionic advisory. A combination of human and artificial intelligence highlights human intelligence and customer preference while leveraging the robo engine, and it optimizes investments in a customized approach, according to Prive Financial, a financial services company that offers bionic advisory. The human element comes in identifying the clients’ emotions, risk tolerance and other variables.
When robo-advisors became a relevant topic, many financial advisors feared that they would end up on the streets. The goal of bionic advisors, however, is not to overthrow financial advisors but to aid them by eliminating the mundane, tedious tasks that waste time and efficiency using technology.
Why are robos and humans both necessary?
As far as numbers are concerned, robo-advisors can outperform human advisors most of the time. With award-winning algorithms that can analyze years of market data in minutes, it is probably safe to say that robo-advisors are much better suited to make the right investment decisions. The human element, however, will remain relevant as long as the financial markets exist. The innate abilities to empathize, relate and understand are unique to human advisors.