What can an in-person Financial Advisor provide that a Robo-Advisor cannot?
This is from a client who hired me after getting started with a robo adviser:
"I like that you can smile when I do something good, and I know to try and avoid that look you will give me when I do something dumb."
Financial Planning and investing isn't just about the numbers and calculation, it's about reaching your financial goals. And I think an in person fiduciary financial planner can do a better job helping your figure out what you want out of life, and how to get there than a calculator.
In the financial industry's dilemna of humans over machines, I am predicting that people will prevail. I do not believe machines will be taking over portfolio management using little human intervention. Robo-advisors is a one size fits all financial solution. Everyone gets the same portfolio which means everyone owns the same stock, when they all decide to sell you could experience selling your position with added downside volatility.
Lets first make a distinction:
1) Robo-advisors offer financial services with minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms. These algorithms are executed by software and thus their financial advice does not require a human advisor. The software utilizes its algorithms to automatically allocate, manage and optimize clients’ assets. Most robo-advisor services are instead limited to providing portfolio management without addressing issues such as estate and retirement planning and cash-flow management, etc which are also the domain of financial planning.
2) A discount brokerage is a business that charges clients significantly lower fees than a traditional full service brokerage firm but without providing financial advice. Discount brokers typically allow investors as well as consumers of financial services to buy and sell on-line while offering comparatively fewer services and/or support.
3) A full service brokerage financial advisor is a licensed financial broker-dealer firm that provides a large variety of services to its clients, including research and advice, retirement planning, tax investing strategies, and much more. Full-service brokers can provide expertise for people who do not have the time to stay up-to-date on complicated issues such as tax or estate planning.
Depending on what your inidividual needs are would determine your choice of financial advice. Retaining the services of an experienced financial advisor far out weigh the services of a robo advisor or even a discount firm. There are many variables and personal financial differences that cannot be evaluted by mathematical algorithms. Also, your financial advisor is a trusted advisor available for consulting with you during the ups and downs of the market. Dealing with a small independent advisor will enable you to customize a portfolio specifically for you and your family.
The two key things that robo-advisors cannot provide is perspective and discipline in keeping you committed to your long-term financial plan. The most expensive cost an investor incurs is when they decide to deviate from their long term financial plan because markets are in turmoil and research shows that most investors cannot stay committed on their own to be able to ride out market turbulence.
Working with an actual human advisor who can act as a “sounding board” for your questions and concerns is one of the most important features of the advisor/client relationship. Online financial planning tools are only as useful as the investor’s ability to stay committed to the results that those tools produce. Advisors can bring perspective about the current market and help bring you peace of mind about your long-term financial success.
As you mentioned, some investors have started to use new do-it-yourself investing and planning apps rather than hiring a human. In fact, a recent KPMG study estimates robo assets under management will reach a staggering $2.2 trillion by 2020. While these tools offer a streamlined and intuitive experience for the masses, they lack the most critical component of advice: personal accountability. Clients will likely never feel accountable to a computer screen. Using a faceless app, you won’t feel as guilty about going against the long-term plan. You won’t worry as much about overspending, forgetting to sign your will, or disregarding life insurance. The best advisors harness new technologies while still providing personal, individualized advice.
In reality, the human element has always been our most important differentiator. Our distinguishable worth was never based on our “unique” portfolio strategy. Even the best analysis can’t always avoid the unpredictability of poor performance. Instead, an advisor’s ability to coach and deter clients from poor decisions represents the biggest differentiator from the robo platforms. A Vanguard study quantified this “advisor alpha” and showed that investors missed out on 3% in returns per year without professional help. Behavioral coaching, or hands-on guidance in all aspects of a client’s financial and personal life, constituted the largest piece of that increase. (For more, see "Coaching Clients Through Financial Planning: How Advisors Add Value By Managing Behavior.")
There are things that "robo advisers" are good at: collecting inputs, running mathematical projections, perhaps even budget management via "account aggregation". However, robos are limited to their programming and cannot engage in any manner of "lateral thinking". Investors often have life circumstances that do not map cleanly onto the robo's options and could potentially benefit from having an experienced human planner or adviser offer some more nuanced advice. Consideration for "complicating factors" like marriage, divorce, a special needs child, abnormal tax concerns, self-employment, a retirement target date significantly earlier than "normal" -- these are all examples that may not be fully addressed by a robo.