When investors employ robo-advisors, there is no debate, there is no exchange of ideas, there is no conversation. There is just function.
Yet, many investors believe robo-advisors can perform those functions just as well as human advisors, accomplishing exactly what the investor had in mind. Robo-advisors are computer programs which use algorithms based on investor information about investing interests to offer investment advice.
Can you argue against that concept? Or are you ready to let robo-advisors have their share of the investor market without a battle?
While many provider and advisor firms provide both types of advice, human and robo, 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 need to do something to combat the impression that algorithms can replace human thought.
If you have any question whether investors actually believe robo-advisors can do the job as well as humans, look no further than the information found in the Spectrem report Advisor Relationships and Changing Advice Requirements. It includes 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.
“The role of technology in the world of financial advice has reached a critical stage,’’ 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. If there is an argument to be made for human advisors, it needs to be clearly stated.”
Just as an example, among Millionaire investors with a net worth between $1 million and $5 million, 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.
How could a robo-advisor be preferable? Beyond the reduced cost, what makes robo-advisors preferable to humans? What are human advisors doing wrong, or not providing, that makes this argument plausible?
Spectrem 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.
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. But there are still large numbers of UHNW investors who see robo-advisors as a viable, and clearly less expensive, option.
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.”
Top Takeaways for Advisors
Perhaps you work for a firm that has created its own robo-advisor service, and you are the next step in advising for investors who are ready to move on to a more complicated and labor-intensive investment plan. You must be prepared to show investors that there are advantages to the human interaction, and those advantages have to be tangible, producing better results and a higher return on investment.
If you work for a firm that is battling the concept of robo-advisors, your task is to provide an immediate proof of value. Your expertise on specific investment products and services, and your ability to communicate the advantages of each product, will prove your worth beyond that of a robo-advisor.
*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR). There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR.