Bot Versus Human: For Financial Planning, It’s No Contest

  • Personal finance
  • 8/22/2017
Casual Business Converation with Couple

There’s more to financial planning than inputs and algorithms. A flesh and bones advisor listens to your hopes and dreams, and helps you plan for what’s next.

It’s hard to pick up a financial periodical or visit a website these days without reading about all the new “disruptive” technologies that are emerging. A lot of what I read lately sounds pretty exciting: self-driving cars, virtual assistants, and artificial intelligence, to name a few. There are pros and cons to all of these developments — it all depends on your perspective.

Until the robo-advisor tools can listen, empathize, and course-correct for all that life throws at us, we’ll keep advising.

In the financial industry, the 800-pound disruptive gorilla in the room is the so-called “robo-adviser.” Entire firms have emerged in the robo-advice space and they have been gathering investor dollars at a brisk pace. Bloomberg reports that robo-advisor services are expected to reach more than $435 billion by 2018.

The rise of the robo-advisor

For those who don’t have their face buried in Barron’s every Saturday morning, a quick recap of the robo-advisor model. The concept is relatively simple: Allow investors to avoid the complexities of asset allocation by answering 10 to 20 multiple choice questions on a website or app. The responses are interpreted by a computer algorithm to decipher the person’s risk tolerance, and abracadabra, you have your investment allocation.

All that is left for the investor to do is fund the account and the computer will invest the money in accordance to the individual’s newly adopted allocation. The value proposition for robo-advice is equally straightforward. It goes like this: Individual investors, left to self-manage their investments, are often heavily influenced by emotion and that can be counter-productive to their success. By allowing a calm, unemotional computer to allocate, monitor, and rebalance your portfolio, you should see superior results. Best of all, several firms are offering their robo-advisor tools for no or low cost.

Try telling your dreams to an algorithm

This is my 25th year in financial services, so thinking about a computer program replacing what a human wealth advisor/financial planner tackles is something I take a particular interest in. And at the risk of sounding like a Luddite, I’m just not buying it.

For the last quarter century, I have sat with clients across desks, at conference tables, and at kitchen tables, taking in their hopes, dreams, fears, and a multitude of nuanced behaviors in order to develop their financial roadmaps. Each plan is as unique as the clients I sit with, but all with a common goal: to achieve their dreams and avoid their fears.

Can a computer truly understand human emotions?

It’s been said that even the best battle plan goes straight out the window with the first shot fired, and in my experience, that’s generally how I’ve seen clients react. In the halcyon days of the late 90's tech boom, clients were ready to abandon their plans to chase the next dot com IPO; conversely, in the depths of the 2008 Great Recession, some investors wanted to sell everything and stuff their cash under a mattress. My concern is that when the going gets tough, you can’t call an algorithm.

These new robo-tools aren’t even as old as the last recession, so their short existence has only been during a steady bull market. It will be interesting to watch what happens when the next recession rears its ugly head. Memories are short and investor enthusiasm continues to push stock valuations ever higher.

When the going gets tough, you need a financial advisor, one you know, who has worked with you to create a goals-based financial plan built to channel and manage your emotions, so you stay grounded and on track.

How we can help

I sleep well at night. Until the robo-advisor tools can listen, empathize, and course-correct for all that life throws at us, we’ll keep advising. You can’t take a client’s emotions out of the calculation as the algorithms try to do. Pretending they aren’t there would be a breach of my fiduciary duty. Yes, these new tools are interesting and they can have merit, just be careful not to confuse a program that produces a blueprint with an architect.

In the meantime, I’m waiting patiently for the self-driving car.

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