Robo-Advisors Vs. Human Advice For Your Investments


Increasingly, the most important question investors have to ask themselves is, should man or a machine manage my money?

Online, technology-driven investment firms have won billions of dollars in client assets. Millennial investors, the recent college graduates and young employees just starting to save for retirement, quickly have adopted the so-called “robo-advisor” model, and their parents could follow.

Naturally, the rise of the robo-advisors has many investors confused — and many longtime financial advisors worried.

Robo firms do a lot of things right, in my estimation. Their technology platforms are first-class and easy to use, thus their attractiveness to young investors. Automated, technology-driven investing encourages people to stop trading stocks and instead to invest their money, usually via low-cost index funds.

Good habits

Importantly, the robo-advisors manage portfolios on a systematic basis rather than by attempting to time the market, that is, getting in and out based on predictions. A lot of powerful investing habits are ingrained into the software itself, reducing the risk avoidable emotional decisions.

My problem with robo advisors, though, is that the term “robo advisor” is a misnomer. These firms are really electronic portfolio managers — not advisors. It’s more accurate to see them as a kind of “fund of index funds” that adds a small layer of fees without offering a layer of advice.

Frankly, I don’t care if robots or humans manage the money. I care about who is managing the all-too-human investor. Humans are better at managing humans because they understand emotions. We can relate to each other.

It’s the gap between machine and man where the “human error risk” easily creeps back into the robo model. Sticking to a long-term plan is just easier when you have to answer to a real person, an advisor who understands your life and your needs. A robot is easy to ignore, as simple as avoiding a text or an email.

The focus among robo-advisor firms on index funds is likely to help investors avoid the greed common among small investors prone to chasing hot stocks. That’s a wonderful improvement.

But take a step back. What prevents a first-time investor (or even a seasoned one) from panicking during a bear market, those unpredictable periods when stocks don’t measure up to expectations? That’s the heart of human investing.

A live, human advisor can act as an emotional circuit breaker during a bear market, protecting the investor from bad choices made in the heat of the moment.

Vested interest

Over time, your behavior at market extremes is what determines your return on any investment. Handling emotional times in the markets is best managed by an objective third party, a person with historical perspective who has a vested interest in your success.

In other words, a financial advisor is still the best chance you have at achieving your long-term goals. Yes, that’s a self-serving answer. But it’s what I believe in my bones.

The reason people earn poor investment returns and therefore fail to achieve their goals is because of mistakes caused by emotions at market extremes. That hasn’t changed in a hundred years, and I don’t see that changing in the next hundred.

Investing technology is a useful, important tool. But robo-advisors cannot and will not override human nature.