Robo-advisors have been heralded as the “future of investing” by their fans, but can computer algorithms really match up to human financial advisors?
How do robo-advisors work?
Robo-advisors are low-cost, digital platforms that use automated algorithms to create and maintain a portfolio. Investors fill out an online form detailing their current financial situation, monetary goals, and investing preferences. Then, the robo-advisor software analyzes the responses.
A recent study by LendEDU found that Millennials, once believed to be the biggest proponents of robo-advisors, actually chose human advisors nearly two-to-one over automated investment services. Other findings from the study revealed that 52% of Millennials believed that robo-advisors are more likely to make mistakes, and nearly 70% thought a human advisor would get a better return on their investments.
Here are 3 reasons why human financial advisors provide more value than robo-advisors.
- Money is an Emotional Matter
The key difference between robo-advisor’s and humans is the ability to offer emotional guidance. Face-to-face interaction allows us to provide behavioral coaching and hand holding, helping clients develop positive budgeting and wealth management habits that lead to long-term financial security. When markets decline or experience an upset, we work with our clients to help them make rational financial decisions and overcome detrimental emotions or impulses.
- Everyone has a Unique Financial Situation
Human financial advisors provide personalized counseling and guidance to help clients achieve long-term financial success, whereas automated online platforms are unable to match this level of personalization. Instead, robo-advisors rely solely on computerized algorithms to determine asset allocation. While traditional financial advisors may use similar strategies, we also rely on our professional history, and we may work with a team or have additional financial tools at our disposal to determine the best investment objectives for each client.
- It’s About More Than Just Investments
Investment advice is just a small part of a complete financial plan. The most sophisticated robo-advisors may offer automatic portfolio rebalancing and tax-loss harvesting, but as people move through life, their priorities and financial goals evolve. Human financial advisors are able to create nuanced investment strategies that take into account changing life circumstances as well as comprehensive financial planning that includes retirement, insurance, and estate planning services, the best exercise of stock options, cash flow monitoring, and more. In addition to helping our clients achieve their financial aspirations, according to a study by Vanguard, when accounting for fees advisors add approximately 3% additional gains per year.
Robo-advisors may be useful for beginner investors with limited assets, but they lack the full range of benefits that would let them serve as true replacements for traditional, human financial advisors. If your finances could benefit from a personal touch, please contact us for a complimentary consultation.