The rise of online investment tools and so-called “robo-advisors” has sparked the heated debate on whether or not financial advisors will have a place in the evolving investment industry.
On one end of the spectrum are the digital investment advocates who claim that investors don’t need human help at all. Robo-advisors will be able to manage portfolios and deliver better returns at a fraction of the cost of traditional financial management services.
While others believe that losing the human element and nuanced expertise of financial advisors will be detrimental to many investors.
We’ve seen this situation before.
As soon as companies such as Travelocity and Expedia broke into the travel industry, travel agencies were left packing. The United States saw a dramatic decrease in retail travel locations, from 34,000 at its peak to the roughly 13,000 that remain today. The convenience and ease of use of automated travel booking websites ultimately rendered travel agents obsolete.
But, the question is, will the fate of the financial services industry be the same?
With the explosive growth of online investment companies such as Betterment, Personal Capital, and Wealthfront, it’s not a stretch to think so. In the past two years, the three have collectively raised over $164 million in venture capital, and thanks to their primarily millennial clientele, have over $1.6 billion in revenue.
The stark difference between the millennial lifestyle and older generations is precisely why the new wave of online investment tools has a fighting chance at expelling financial advisors from the industry.
Adapting to the way millennials invest
The millennial generation is known for being digital natives who grew up with technology as a part of their daily lives. This means their lifestyle and habits are very different from previous generations. Especially, when it comes to investing and money management.
Legg-Mason, a global asset management company based in Baltimore, has been conducting surveys for the past five years in an effort to uncover what motivates the average investor. According to their 2017 Global Investment Survey, 67% of millennials admitted that ideally, they would “carry out all their financial planning on their smartphone or mobile device”, compared to only 16% of baby boomers.
It’s evident we’re in the midst of a cultural shift, where people increasingly prefer to receive services via digital channels, rather than meeting in person or doing things the “old-fashioned” way. And, many companies have taken notice. This is why online investment tools have developed advanced algorithms to build personalized portfolios for their investors. These automated portfolios are accessible through the touch of a button and are designed to deliver optimal returns based on your personal risk assessment.
However, as enticing as these options sound, the question remains: Are they really enough? Or, is the human element essential in wealth management?
The Human Element
The algorithms used in many online investment tools are sophisticated, to say the least. But, many are not dynamic enough to be able to pivot your investment strategy in times of crisis, or when life throws unanticipated events at you.
Those who argue against robo-advisors believe they are too simplistic to be able to offer the deep understanding a human advisor can, based on the nuanced and ever-changing needs of most investors.
The core of most online investment tools is a simple risk-tolerance questionnaire that is designed to help the robo-advisor build a personalized portfolio. However, these questionnaires often fail to get an in-depth analysis of an investor’s financial needs and goals, in order to build a portfolio that fits into their entire financial context.
In contrast, working with a human financial advisor, investors can receive custom-tailored financial plans that address the entirety of their evolving needs. Whether that be insurance needs that must adapt to a growing family, or creating an effective estate plan.
Additionally, financial advisors are able to offer continuous support and mentoring as things inevitably change throughout the years. There are no shortages of market-volatility or sudden cash-flow needs that may pop up, and when they do, investors will be happy there is a mentor on their side, helping them navigate through uncharted territory.
However, with that being said, human advisors also bring with them human mistakes and biases. Some more costly than others and some due to human qualities such as greed.
Research has shown that many advisors actually steer their clients toward products that are in their own best financial interest, not in the financial interest of their clients. While a wealthy investor can mitigate the risk of this behaviour by seeking an independent advisor that charges hourly rather than commission based, most investors are not as fortunate.
This brings us to another unique feature of online investment platforms–their universal accessibility.
Bridging the Gap of Financial Illiteracy
Online investment tools bring investing to the masses. Most people who in the past may have been unable to afford financial advisors can now gain access to sound financial advice and insight into various investment techniques, they once knew nothing about.
What makes the cost of online investment tools so low is their ability to automate processes which traditional financial advisors conduct manually. The portfolio management automation is what lowers overhead costs and passes the savings onto you–the average person who never thought they’d be able to invest at a high level.
Traditional advisors charge annual fees between 1%-2% of assets, while robo-advisors typically charge between 0.25%-0.50% Although the difference may not look big at face value, if an investor collects a few thousand dollars each year for investing over his lifetime, the difference in fees can amount to tens of thousands of dollars in lost wealth.
What’s more, many financial services firms charge you for a variety of services packaged together, regardless of if you need or use most of them.
The Ideal Balance
So, with pros and cons on both ends of the spectrum, how can you decide which strategy is best for you?
The truth is, there is no one size fits all approach to investing. Each investor needs to assess which method is best for them. For example, someone who has complicated tax or estate planning needs may be better off with a financial advisor who specializes in those fields. While someone who is just starting out and investing very small amounts will benefit greatly from a robo-advisor platform.
Or, if you’d like the best of both worlds, the ideal solution is a combination of the two approaches.
One option is to go with online investment tools such as Swanest, who empower self-directed investors with intelligent investment advice along the way. Instead of blindly investing, their platform uses automated advice and algorithms to provide assistance through each challenge a do-it-yourself investor may face–leaving you in control of the process, yet empowered by their technology.
Alternatively, you can go with a financial firm who offer digital services as well. These types of firms provide you with traditional financial advisors that give personalized service to their clients. However, they also integrate digital tools into their offerings such as, Finworx that uses behavioural finance-based questions to provide advisers with a deeper understanding of how their clients approach risk and decision making.
These hybrid models provide investors with access to an online platform and the personalized service and knowledge that comes with an advisor. In fact, according to Spectrem Group, 55% of mass affluent clients are neither exclusively do-it-yourselfers or advisor-only clients. They use both a financial advisor and place a portion of their assets into online investment accounts such as E*Trade or Wealthfront.
It’s clear that online investment tools are gaining momentum. Therefore, in order to avoid the fate of travel agents, financial advisors must adapt. They need to learn how to provide value to their clients by leveraging technology to enhance their services. This way advisors can provide clients the ability to trade online, view their transactions, and reach out to their advisors for advice along the way.
