Time and again, science fiction has told the story of automation replacing humans in vital activities, with dire warnings included.
Such a story is being played out today in the world of financial advice, as so-called “robo-advisors” provide investment advice to investors who choose not to pay a higher fees or commissions for human advisors.
While many firms provide both types of advice, a significant portion of the human advisor population finds itself doing battle with robo-advisors and trying to explain just how a human advisor should be preferred to a robo-advisor in specific circumstances.
Humans may be losing that battle, and may need to do something to combat the impression that algorithms can replace human thought.
Our latest wealth segmentation series study Advisor Relationships and Changing Advice Requirements provides data that shows that many investors believe robo-advisors can provide the same quality of advice a human advisor can, even in incidents when common sense might indicate a human advisor would be preferred. The percentages are not above 50 percent, but they are high.
“Technology has entered the world of financial advice, and many firms are answering the call by providing advice electronically,’’ said Spectrem president George H. Walper Jr. “It is revealing to see how investors perceive the ability of so-called robo-advisors to provide the same level of advice human advisors can.”
Let’s look at Millionaire investors with a net worth between $1 million and $5 million Not Including Primary Residence. Among those investors, 69 percent believe a personal advisor would be preferred to a robo-advisor in establishing a financial plan, which does seem to be a potentially complicated and detailed process.
However, 24 percent of Millionaire investors believe a robo-advisor could do that job just as well as a human, and 7 percent believe a robo-advisor could do a better job at that task. And that is the low end of the spectrum.
Retirement planning is a big part of the financial advice market these days, and investors can spend hours considering their options regarding the investments they choose to provide retirement income down the line. But 30 percent of Millionaire investors believe a robo-advisor could provide that information just as well as a human advisor.
Also, 16 percent of Millionaire investors believe a robo-advisor would be preferable in that instance. Only 54 percent of Millionaire investors believe a human advisor would be better for selecting investments related to a retirement plan.
Our research shows that investors will often change advisors if they do not believe the advisor correctly understands the investor’s level of risk tolerance. But 28 percent of Millionaire investors believe a robo-advisor could pick stocks to meet their own risk tolerance as well as a human advisor could, and 16 percent believe a robo-advisor could do that better than a human advisor.
Although wealthier investors - the Ultra High Net Worth investor with a net worth between $5 million and $25 million NIPR - are less likely to prefer robo-advisors over human advisors in the above stated examples, more UHNW investors believe robo-advisors are just as capable of fulfilling those tasks as human advisors.
Look at the retirement plan question as an example. Thirty-four percent of UHNW investors believe a robo-advisor could advise them on selecting investments for a retirement plan as well as a human advisor could.
“Advisors and financial providers must prepare themselves to show how they provide higher quality and more in-depth advice than robo-advisors if they want to hold on to clients or attract new ones,’’ Walper said. “Deeper understanding of a potential client’s investing habits, concerns and attitudes would go a long way toward allowing an advisor to be more responsive to a client’s needs than a robo-advisor.”