Are Robo-Advisors = Financial Advisors?

1/1/2022

Robo-advisors have been around for over ten years, increasing in popularity and quantity over the years.  What exactly are robo-advisors and are they better, the same, or worse than a financial advisor?  

When a firm is offering a “robo-advisor” there is not a Lost in Space “Danger Will Robinson” robot employed at the firm placing trades, or a Rosie from the Jetsons evaluating the stock market conditions. But there are computer programs that are reviewing investments and the markets, coming to conclusions based on complex algorithms and mathematical formulas. Some of these “robo-advisors” take information from client surveys to develop risk tolerance, time horizon, and with a variety of other factors, and come up with a passive indexing strategy for the investor to follow.

In either situation, or in the multitudes of other scenarios that are available on robo-advisor platforms, the focus is on a computer program and not human interaction. These platforms are often available at a lower price point compared to working with an individual financial advisor, which can make these options attractive to some investors. Are these options just as effective as a individual financial advisor when it comes to financial planning? Some investors think so.

 It is not surprising that the generation that grew up embracing technology and artificial intelligence is the most likely to feel that a robo-advisor could be as effective in financial planning as working with an individual financial advisor, with over half of Millennials feeling that way according to recent research from Spectrem Group. Twenty-nine percent of Gen X investors feel similarly, however the percentage drops significantly among Baby Boomers and Gen Xers who feel that a robo-advisor can be as effective as working with an individual. Men are also slightly more likely to feel that a robo-advisor can be as effective, with 21 percent feeling that way compared to only 15 percent of women.

 There is little difference in the confidence levels of a robo-advisor by wealth, with 32 percent of investors with a net worth of $100,000-$499,999 feeling that a robo-advisor could be as effective as a human advisor, while 27 percent of those investors with a net worth between $10MM-$25MM feel similarly. Investors with mid-level wealth, those with a net worth between $500,000-$4.9MM are slightly less likely to feel that a robo-advisor can be as effective as an individual financial advisor.

Knowledge level does have quite a bit of impact on impressions of a robo-advisor, with over a third of those investors who are the most knowledgeable indicating that they feel a robo-advisor could be as effective in financial planning as an individual financial advisor, while less than 10 percent of those investors who are not very, or not at all knowledgeable feel similarly.

 Educators agree with those investors who are not knowledgeable, as only six percent of Educators feel that a robo-advisor can be as good as an individual advisor in financial planning, while 29 percent of those investors in the field of information technology feel that way, and 43 percent of Business Owners feel similarly.

 If an investor is considering using a robo-advisor, it is important to understand exactly what they are going to receive from the robo-advisor and what services, or planning is included in the platform. It is also helpful to know that if the occasion did arise where working with an individual was needed, would that be available as well. Robotics and artificial intelligence may be here to stay and increasingly part of our lives, but it is up to each individual to determine if they trust an algorithm as much or more than they trust an individual.