The Future of Investing: Man vs. Machine

7/11/2018 - By Chris Stennett, CFP®

When I first heard the term “Robo-Advising,” I was a senior in college, getting ready to enter the field of financial advising. The name alone was enough to make me worry that I had chosen the wrong profession. I hadn’t even made my first student loan payment, yet my future career was about to be replaced by machines! If that wasn’t bad enough, the 2008 mortgage crisis had just occurred. Ten years later, financial advisors haven’t been replaced by machines, and it’s important to understand why.

What is Robo-Advising?

First, I want to make sure we’re all on the same page. Robo-advising is defined as: “Digital platforms that provide automated, algorithm-driven investment services with little to no human supervision.” Translation: A computer makes all the investment decisions in a person’s portfolio. How? First, an investor completes an online questionnaire to give insight to their financial situation and goals. Then, the robo-advisor uses that data to create an investment strategy. On-going investment decisions are made solely by the robo-advisor. In the end, the investor has a managed investment account, without having to hire a human financial advisor. 

What are the Advantages?

There are some notable advantages to this approach. First, it’s low cost. Based on an online survey of the 10 largest robo-advisors (by Assets Under Management), the annual cost ranges between 0.2% - 0.5% of assets invested. It’s not uncommon for a human advisor to charge more than twice that amount. Second, they’re available to any investor, with low to no account minimums. Most human advisors have a minimum investment amount, which limits access for new investors. Third, Robos are efficient. All trades are made by the robo-advisor, rather than through dialogue with a human financial advisor.

And the Disadvantages?

So, why haven’t human advisors been replaced? Well, there can be some significant disadvantages to a robo-only approach. Last year, I met one of my clients after her spouse passed away. During our meeting a lot of tears were shed as we reflected on her husband’s life. Her husband oversaw the finances including investments and monthly bills. Now, after 30 years of marriage, she’s in charge of all the financial decisions. She felt completely unprepared to make those decisions and was looking for guidance and education on how she can manage the new responsibilities. Robo-Advising is not designed to deal with crisis or extraordinary situations. 

Another shortfall of robo-advisors is their inability to incorporate the other areas of financial advice that make human advisors so beneficial, such as estate planning, trust fund administration, and complicated tax management. Imagine being a business owner and getting hit with a major tax bill because your robo-advisor was unable to meet with your CPA and design a plan relative to your needs. It’s not possible for a short online questionnaire to properly diagnose every challenge an individual may have.

Communication is Key

One last thought to consider is how you, as the investor, prefer to communicate. Human advisors are just that, human. You can call them directly, meet them face-to-face, and get transparent information with a certain level of accountability. Computers on the other hand… just think about the last time you called your cable company and struggled to get past the Robo-switchboard. Imagine that being how you interact with your financial advisor! 

Ultimately, decision making for the robo-advisor boils down to a mathematical equation. Human advisors may charge more, but they also offer more. It’s important that as an investor, you understand what your options are. Once you’ve identified your needs, and you know your options, you’ll know which approach is best for you. 

Saltmarsh Financial Advisors believes in the value of human connections.  We maintain that the most appropriate and comprehensive way to help our clients is to develop a relationship and open dialogue between advisor and client.  We offer low-cost, tax efficient investments and provide complex financial and tax planning services to assist our clients in achieving their goals. If you have any questions, please don't hesitate to email me or contact a member of our team.

About the Author | Chris Stennett, CFP®
Chris is a financial advisor and Certified Financial Planner™ for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He serves individuals and organizations as a comprehensive financial planner and coordinator of investment activities. His areas of expertise include investment management, income planning, tax and estate planning, incapacity protection, and liability management.

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