By Sean R. Walters
In recent years, automated advice platforms or so-called robo advisors have become popular, with the idea of a “smarter” way to invest with the help of technology. It’s true that technology is changing the way we approach investing—and robo advisors are more than a passing fad.
As with anything new, there are plenty of myths swirling around robo advisors, who uses them and what’s next. Here are some of the most common myths about robo advisors and what you need to know about how they’re really being used.
1. It’s all about the algorithm
The biggest myth around robo advising is that the robots (or the algorithms) are in charge.
In reality, robo advisors have humans at the helm. While parts of portfolio creation are automated, the truth is that most robo advisors have teams of actual investment professionals guiding the process.
For more traditional advisors, the use of robo advising technology can be a big help in better serving their clients. Integrating technology into a wealth advising practice can help professionals better manage their time, customize solutions for clients and add value.
“The growth of robo advice has demonstrated the demand for technology to optimize the fundamental tasks of wealth management,” says Devin Ekberg, CFA, CPWA, CIMA, and chief learning officer and managing director of content development at the Investments & Wealth Institute.
He points out that advisors can use technology to handle certain automated tasks, freeing them up to focus on adding value in areas that technology can’t handle for wealthy clients.
“Advisors that use technology to automate certain tasks can use their newly found time to focus on personalizing their relationships with clients,” Ekberg says.
2. Millennials prefer robo advisors to humans
It’s common to view millennials as digital natives who would much rather interface with technology than interact with humans. However, the reality is that millennials, while comfortable with technology, also like the idea of customization and a personal touch to provide guidance.
Millennial investors do have a different style than what’s been seen with previous generations, Ekberg concedes, but that doesn’t mean they are ready to abandon human help with their investments. While millennials might start investing with robo advisors, as their portfolios grow and as they become high-net-worth individuals, they want access to more options and customized strategies designed to help them meet their individual financial goals.
In fact, later this year the Investments & Wealth Institute is presenting a Behavioral Advisor Forum aimed at helping investment professionals understand how they can use various behavioral finance techniques to focus on the needs of millennial investors. Ekberg hopes that some of the sessions presented at the forum will help human advisors understand how to better connect and provide value to millennial investors.
3. Robo advisors will displace human advisors in the future
It’s true technology is here to stay. Robo advising isn’t just a pass fad. However, the reported death of the entire human-based wealth advising industry is largely overblown. Ekberg points out that many investors prefer a hybrid approach to investing.
“Clients clearly prefer technology to augment their relationship with their advisor, not replace it,” says Ekberg.
Besides, there are things that an algorithm just can’t do, including behavioral coaching, family governance, business planning and charitable giving strategies. Rather than expecting to compete with robo advisors, Ekberg suggests that wealth management professionals look for ways to set them apart.
“Having technology is essential, but it’s not what sets a financial advisor apart from the competition,” Ekberg says.
4. Only those with limited assets are interested in robo advisor technology
While robo advisors have been pegged as the solution for millennials and others without many assets, the reality is that some high-net-worth individuals are starting to include robo advisors in their planning.
It’s true that robo advisors can’t meet all the customized planning needs for wealthy clients, but many of them like robo advisors for management of some parts of their portfolios. Here’s where human wealth management professionals can shine, however.
Research indicates that more than 50% of high-net-worth clients globally rank “hybrid advice” as very important. These clients are looking for more than just a robo advisor to manage their money. They want the algorithm to manage and streamline some parts of their portfolios, but when it comes to long-term planning and tweaking the portfolio to match individual needs, nothing can beat a qualified human advisor.
Understanding that wealthy clients might be using robo advisors in addition to human advice is an important part of helping clients meet their own needs. A good human advisor will account for the robo-managed portion of the portfolio and effectively integrate the automated investing into the larger plan for high-net-worth individuals.
5. You have to choose between humans and robo advisors
This is perhaps one of the most insidious of robo advisor myths. There doesn’t have to be a competition. In fact, many investment professionals use robo advising technology as part of their practice—and it works very well for clients.
Ekberg emphasizes the research indicating that many investors prefer a hybrid approach. Even if they aren’t using a separate robo advisor, most clients expect their advisors to use technology to enhance their offerings.
“Investors expect robo advisor platforms to supplement their interactions with a human advisor,” Ekberg says. “Clients expect technology to be used to augment the advisor’s role, especially in areas like investment management and tax advice.”
Robo advisors are likely here to stay. But that doesn’t mean that there’s no need for human advisors. Certain planning needs will almost certainly need the customization that only a competent human advisor can provide.
With the right approach, and with a willingness to embrace the ways technology can aid in wealth management, it’s possible for wealth advisors to provide hybrid advice that clients are likely to find valuable.
Sean R. Walters, CAE, is chief executive officer of the Investments & Wealth Institute.