In many ways, the emergence of robo-advisors has made the financial services industry better for both clients and advisors alike. The underlying technology continues to bring welcome changes to an industry in dire need of them. More specifically, this has introduced greater highly efficiencies, lower costs, and an emphasis on transparency. These are all good things. However, there are some things that a robo-advisor cannot do, which necessitate the need for a human-advisor.
There is a misnomer that these platforms are only for do-it-yourself investors, which is being debunked as more investors want elements of the robo-advisor—online access, transparency, and data visualization—pairing with the advice that only a human can provide. We think this is a critical point; the investor benefits when much of the ‘blocking and tackling’ is accomplished with a robo-like interface, and paired with a strategic human relationship. This is particularly true during times of market turbulence or unforeseen life events.
It is not clear how robo-platforms will perform during a market correction, as demonstrated back in February when some platforms went dark during the stock market plunge. In this instance, some investors didn’t have online access for 48 hours and weren’t getting through to the customer service number either.
How’s that for efficiency?
Aside from investors being locked out to online access, those that could login experienced slow load times of up to thirty minutes. As the plunge continued, trading was eventually suspended at Betterment, while other robo platforms acknowledged “intermittent technological difficulties.” It should be noted that the February market plunge was hardly apocalyptic and, therefore, we question how these platforms can handle an actual calamity. While the answer to this remains uncertain, it is clear to us that investors should always have the option of calling a human advisor when technology fails us. In times like this, human advisors will outperform machines.
Another concern we have about robo-advisors is their economic viability. Eventually, the angel investors and venture capitalists have to collect. At the moment, the robo-revolution is losing some steam, as expectations of both the angel investors and the general public are beginning showing signs of decay. Recently, we’ve seen Wealthfront promote the use of risk-parity with its clients. This has not only raised fees but also lead many to question the appropriateness of such a strategy for the average client.
At best this is a dubious attempt serve their clients, and at worst, it is an alarming red-flag that robo-advisors are not economically viable as a stand-alone product.
As an investor’s life becomes more complicated, technology-driven investment platforms, such as those used at SWS Partners, become valuable inputs alongside the human aspect of the relationship. While technology can empower the client, they do not replace the need for human advice. With financial markets experiencing some turbulence of late, this will grow increasingly relevant. Just the same, SWS Partners does not have any angel investors, so we can deliver advice that is free from conflicts of interest.