Do investors really want robo-advisors to help manage their money?
Whether it’s self-driving cars, algorithm-generated playlists, or groceries shipped right to your door, automation seems to be everywhere. The trend is present in financial planning as well, with robo-advisors recently exploding in popularity, providing an easy way for some investors to manage their money.
While it may be convenient, is it the right move? And are Americans ready to turn over important wealth management decisions to artificial intelligence? The jury’s still out on whether robo-advisors are the future. But as a financial professional, you may need to be able to articulate why and how financial planning requires a human element that robo-advisors may not deliver, as well as why prospective clients should choose you.
What are robo-advisors?
The term ‘robo-advisor’ can encompass a wide range of tools, but it primarily refers to automated investment services that may provide investors with an easy way to manage their portfolios and make investment decisions. According to The Wall Street Journal, robo-advisors can also exist in a hybrid form, where human advisors provide a sort of holding guidance to their robotic counterparts.
Robo-advisors have certainly grown in popularity. According to figures from Statista, a projected $2.67 trillion will be under management by robo-advisors by the end of 2023 — and that figure is expected to grow to $4.53 trillion by 2027.
“If you’re not a hands-off investor, robo-advisors aren’t a good option for you. The decisions made by the software are based on your profile, not your personal preferences.”
The appeal of robo-advisors
Robo-advisors can be appealing to investors for several reasons. For one, they may be a good fit for people who are relatively new to investing. Additionally, they typically charge slimmer fees than human financial professionals.
Robo-advisors may certainly have a time and place — even some financial professionals admit that. Specifically, they may be well-suited to investors who are just starting out and may not have a lot of assets.
“Robo-advisors have undeniably revolutionized the wealth management and investing landscape, offering clients with less complex financial situations and lower asset levels access to low-cost advice and portfolio management tools,” says Joe Chappius, financial planner and writer for ModestMoney.com.
A recent study conducted by Magnify Money shed some light on attitudes toward robo-advisors. The study, which surveyed 1,600 people, found that 63% of respondents are open to using a robo-advisor. But while there’s interest, only 1% of those surveyed said they actually used one. Interestingly, among those who don’t have a financial professional of any kind, approximately 80% said they’d be open to using a robo-advisor.
The shortcomings of robo-advisors
There can be drawbacks to using robo-advisors. One of the most serious is vulnerability. According to Matthew Roberts, COO and co-founder of My Choice Financial, because of the virtual nature of the tools, they may be susceptible to hackers and thieves who want to steal your information.
Roberts also points out that for investors who want a more hands-on approach, robo-advisors may not be a good fit.
“Flexibility may also be limited with robo-advisors,” he says. “If you’re not a hands-off investor, robo-advisors aren’t a good option for you. The decisions made by the software are based on your profile, not your personal preferences.”
Human touch: Separate yourself from the robots
While there appears to be interest in robo-advisors, there also appears to be some reticence among the public to turn over their assets and financial planning needs to automated programming. The reason may rest with something flesh and blood financial professionals can offer that robo-advisors can’t: human connection.
Jordan Taylor, an independent financial professional with Core Planning, agrees, pointing out that robo-advisors don’t actually offer any real advice —just model portfolios and a more general approach.
“Real financial professionals may have nothing to fear. Financial planners, consultants, and financial professionals actually help the people they serve plan for their life, build their financial dreams, and provide advice on how to navigate the ‘ever changing landscape’ that is life,” Taylor says. “A robo-advisor can charge you a fee, ask a few questions, and determine the mix of fixed-income and stocks in your portfolio.”
It goes beyond the nuts and bolts as well. Financial professionals have the ability to empathize with their clients, and truly understand their needs, wants, and wishes. Understanding who clients are as people plays a huge role in shaping a financial plan and helping clients meet their retirement goals — and it’s something robo-advisors are incapable of doing.
“A real financial professional does so much more,” Taylor said. “They may help people digest their financial trauma, beliefs about the world, and understand their purpose in life and the purpose of their money.”
Chappius echoes this sentiment. And he says that robo-advisors can challenge financial professionals to provide even better service — which may benefit both them and their clients. “The rise of robo-advisors is forcing financial advisors to up their game and deepen their relationships with clients,” he says. “Instead of merely focusing on managing portfolios, financial professionals are now challenged to better understand the unique and often complicated emotional and human aspects of financial planning.”