Are Robo-Advisors On Their Way To Replacing Human Advisors Altogether?

Lately, there has been a rise in the number of firms offering investment services through digital platforms called robo-advisors, which provide automated portfolios with little, to no, human contact. Combine that with COVID-19’s effect on the opportunities for face-to-face meetings, add in a healthy measure of financial news headlines heralding a new era in robo-advisors and a touch of inflation fear and you have a recipe that has many believing that human advisors are under threat from digital services.

There’s no denying that technology and data hold a critical role in the decision-making process and are greatly beneficial in the financial sector. But how do robo-advisors compare to human advisors? Once solely in the hands of advisors, the rise in technology and ease of access begs the question, are robo-advisors on their way to replacing human advisors altogether?

In a recent study done by Vanguard, they provide an inside look at this debate and compare the difference in investors’ views on the value of human and robo-advice. The study suggests a win for humans — while robo-advisors are adept at certain aspects of financial advice, human advisors still come out on top.

Of the more than 1,500 investors surveyed, when asked what kind of service they would choose in the future, 93% of those currently working with a human advisor would choose to continue to have a service that included a human advisor. On the flip side, 88% of investors that are currently robo-advised would have a strong willingness to work with a human advisor in the future.

The Vanguard study broke down the value of advice into three categories: portfolio value, financial value, and emotional value. Of the three categories, human advisors showed more preferable results in financial and emotional values. Let’s dig into the results.

Portfolio Value

In measuring the value advisors add to a client’s portfolio performance, Vanguard asked the surveyed investors what they believe their performance was with a financial advisor and what they believe it would have been without a financial advisor.

While the results show that investors believe both human and digital advisors provide substantial portfolio value, human-advised clients attributed five percentage points to the help they get from their advisor while digitally advised clients only attributed three percentage points to their advisors.

Despite human-advised clients finding more value with their advisors, the digital-advised investors perceived a higher level of returns than human-advised investors. There are a number of factors going into this, one of which being that digital investors tend to be on the younger side and will often be more aggressive in their investments, which would lead to a higher level of perceived performance.

Financial Value

Financial value is viewed as the ability to meet one’s goals outlined in a financial plan. In comparing how much of their goals they believe they have achieved with their financial advisors and how much they believe they would achieve without their financial advisors, human advisors contribute much more to an investor’s success than digital advisors.

Looking at the percentages, human-advised clients believe they have achieved on average 59% of their goals compared to only a perceived 43% without an advisor. For digitally-advised clients, the average percentage of their goal achieved was 50% with an advisor and 45% without an advisor.

Emotional Value

Given the volatile nature of the markets, the emotional value of advice goes a long way in putting clients’ minds at ease and decreasing anxiety. As a means to measure the emotional value provided by human and digital advisors, the study asked whether investors had peace of mind knowing that a human or digital advisor was looking after their investments and if they would have peace of mind if they were managing their own investments. The results show that human advisors increase investors’ peace of mind by 56% while digital advisors only increase peace of mind by 12%.

There’s no right or wrong answer to which route of advice you should go — provided you find the one that’s right for you. Both digital and human advice can bring added value to the table compared to going about investments on your own. But in the end, we believe that not only will human-advised investors report higher levels of satisfaction than digitally advised investors, we believe the firm you select to work with makes the most difference.

While the notion of robo-advisors sounds convenient, maybe even appealing, they aren’t going to be replacing human advisors anytime soon. And while investors prefer some of their portfolio management to be automated, human advisors far outperform robo-advisors in delivering emotional value. The good news is that advisors can leverage technology to achieve some of the benefits of digital advice to further focus on providing the skills that are unique to humans — the ones that truly define something irreplaceable… a relationship.

_{Sonoma Wealth Advisors is a DBA of Fermata Advisors, LLC, a registered investment adviser, and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. The information presented is for educational purposes and believed to be factual, but we do not guarantee its accuracy and it should not be regarded as a complete analysis. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice. An investment adviser representative should be consulted directly before implementing any investment strategy. Investments are subject to market risks and the potential loss of the entire principal amount invested. Past performance is no guarantee of future results.}