The Personal Touch: Why Customized Advice Can’t be Replaced by Algorithms
By Jeremy Reif, CRPS
Robo-Advising and the Rise of Automated Investment Management
In recent years, the investment management industry has experienced a rapid transformation with the advent of technology and artificial intelligence. Robo-advisors, algorithms, or automated investment management platforms, have gained significant popularity among investors who seek convenient, low-cost, and efficient investment solutions. Similar in ways to the buy an hold system has worked for 401k investors in terms of set it and forget it. Would the same trust be there at a point of impact like retirement and trusting AI with a $1M+ investment?
Robo-advisors use algorithms and computer models to analyze a client’s financial situation, investment goals, and risk tolerance. Based on the collected data, the robo-advisor then creates a portfolio of investments that is customized to meet the client’s specific needs. The platform automatically manages the portfolio, regularly rebalancing it to ensure that the asset allocation remains aligned with the client’s investment objectives or risk profile.
However, despite the benefits of robo-advisors, many financial experts argue that a human element is still necessary for investment management. In this article, we’ll explore why a human touch is essential in the world of finance and why a robo-advisor can never fully replace the services of a human financial advisor.
Emotional intelligence
Investment decisions are not just about numbers; they are also about emotions. People can be emotional about their money and make irrational decisions, especially during times of market volatility or substantial changes in life (i.e. retirement). A human financial advisor is better equipped to understand and manage the emotional aspect of investing. They can help clients make rational decisions, even in difficult market conditions, by using their emotional intelligence and experience.
Personalized advice
Robo-advisors use algorithms and computer models to create portfolios, but they can never replace the personal touch that a human financial advisor provides. A human advisor can offer customized and tailored advice based on a client’s specific situation, whereas a robo-advisor can only provide generic advice based on the data it collects. This can lead to less-than-ideal investment outcomes for clients who have unique financial circumstances or goals.
Long-term perspective
Investing is a long-term game, and a human financial advisor can provide a more comprehensive perspective on the market and the economy. They can offer valuable insights and advice based on their experience and understanding of market trends. A robo-advisor, on the other hand, can only make decisions based on the data it has been fed and can’t provide the same level of insight and perspective as a human advisor.
Human connection
Investing can be a complex and overwhelming process, and many people need someone they can trust to guide them through the process. A human financial advisor can offer a human connection and a sense of comfort that a robo-advisor can never provide. Clients can build a relationship with their advisor, and this can provide a sense of security and peace of mind, especially during difficult market conditions.
Commoditization of the Financial Industry
In recent years, technology has enabled the financial industry to become more commoditized, with robo-advisors being at the forefront of this trend. The increased availability of financial information and the ease of accessing it through online platforms have led many investors to believe that they no longer need a human financial advisor. This has led to the commoditization of investment advice, and many investors now view financial advice as a commodity that can be easily purchased online.
However, while robo-advisors may be cheaper and more convenient, they are also limited by their algorithms and lack the personal touch that a human financial advisor provides. The commoditization of financial advice has led to a decline in the value of human expertise, and many financial advisors are now viewed as interchangeable and dispensable.
This commoditization trend is particularly concerning for financial advisors who are focused on providing personalized and customized advice to their clients. The personal and emotional aspects of financial planning cannot be commoditized, and human financial advisors provide a level of expertise and personalized attention that is essential for achieving long-term financial success.
AI and Market Volatility
While robo-advisors can be effective in managing portfolios, their reliance on algorithms and data-driven decision making can also add to market volatility. The algorithms used by robo-advisors are based on historical data, and they make investment decisions based on this data. However, market conditions can change quickly, and the algorithms may not be able to adjust to these changes in real-time.
During times of market volatility, robo-advisors may make moves based on the data they see, even if the data is outdated or inaccurate. This can lead to suboptimal investment decisions and increased market volatility. For example, during a market downturn, a robo-advisor may sell off assets to meet its pre-programmed risk tolerance levels, even if this is not the best decision for the client.
A human financial advisor, on the other hand, can make investment decisions based on a more comprehensive understanding of market conditions and the client’s specific situation. They can also provide a more nuanced perspective and offer a more holistic approach to managing portfolios, including considering factors such as tax implications and estate planning.
While robo-advisors have become increasingly popular in recent years, they still fall short in comparison to human financial advisors. Robo-advisors rely on algorithms and data-driven decision making, and while they can be effective in managing portfolios, their limited perspective and lack of personal touch can result in suboptimal investment decisions. Human financial advisors, on the other hand, bring a wealth of expertise and experience to the table and are able to provide customized and personalized advice based on a comprehensive understanding of market conditions and the client’s specific situation.
Moreover, the commoditization of the financial industry has reduced the value of human expertise, and many investors now view financial advice as a commodity that can be easily purchased online. However, the personal and emotional aspects of financial planning cannot be commoditized, and human financial advisors provide a level of expertise and personalized attention that is essential for achieving long-term financial success and perhaps making the human element more of a premium.
While technology has made financial services more accessible, it has also led to the commoditization of the financial industry. For those who value personalized and customized advice, a human financial advisor is still the better option. The ability to make investment decisions based on a comprehensive understanding of market conditions and the client’s specific situation is what sets a human financial advisor apart from a robo-advisor, and it’s important for investors to recognize the value that a human financial advisor can provide.