While you are reading this there is a good chance that a new digital platform claiming to be able to manage your portfolio for a fraction of the cost just popped up. These ubiquitous, low-cost robo advisors get a lot of press, but most affluent investors aren’t willing to entrust their wealth to an algorithm based on a handful of questions and then trust a computer to manage their money. What is it about human advisors, even at higher costs, that are appealing to affluent investors?
A study by Vanguard, “The Added Value of Financial Advisors” illustrates how a good financial advisor “may add 3 percentage points of value in net portfolio returns over time.” Portfolio construction, wealth management and, most importantly, behavioral coaching are where the value is added. This highlights the human element of financial advice.
While it was a savvy marketing move of the direct-to-consumer robos to define themselves as advisors, they are basically self-directed investing platforms. As computer algorithms, robos can’t solve behavioral issues that concern clients when opening their accounts. Anyone employing a robo advisor for advice will be told to invest all they can, no matter what their personal circumstances, as their product offering is solely focused on investments.
Robos only ask about your preferences for investing and do not consider your financial situation. For example, if you have debt through credit cards or student loans, good advice might be to pay down that debt before investing in the markets yet you will not hear that from an investing algorithm. Robo-advisors are merely providing an asset allocation service and not holistic financial advice.
A robot cannot possibly empathize with your worries and concerns while a human advisor can address your questions and have meaningful discussions to act as a guide or a behavioral coach. You can’t have a valuable discussion with a robo advisor about the effects of a Trump Presidency for your investments. Or ask as a retiree if you should take CPP payments early or convert your RRSP to a RRIF before age 71. There is no right or wrong answer that can be given without considering your circumstances, behavior and emotional state. Only a human can empathize with you to provide the best advice for your particular situation.
The role of a financial planner is to help the client change their behaviors when necessary to navigate the emotional journey of long-term saving. Robos lack basic human characteristics, especially the ability for listening, understanding and empathizing, which make a human advisor attractive for the affluent. People need to feel heard and understood before they are willing to take someone’s advice about how to change their behaviour and those feelings of connectedness are an exclusively human-to-human domain.
Empathy is about putting ourselves in someone else’s shoes and being able to consider their perspective in order to formulate the right response. Only a human can have empathy, or the ability to discern what someone else is feeling. This gives a human advisor the best ability to respond in the most appropriate way.
With the trend of robo-advice growing, advisors need to transition from “knowledge workers” to “relationship workers.” We have nearly a decade of research that tells us when a financial advisor empathizes with clients and develops social relationships their clients rate the advisor’s performance at a higher level. The more affluent clients hear about fees and robo-platforms, the more financial advisors need to personalize the advisor-client relationship. Advisors who personalize the relationship while delivering professional excellence get three times the introductions and referrals as those with only a business relationship.
As an advisor use your natural, HUMAN abilities of listening and empathizing to deepen your relationships with clients and you will never need to be concerned about the rise of the robos.