Here at nVest Advisors, we’re very excited for the future of technology in our industry, and for good reason. As a very early adopter of a variety of tech solutions, nVest has been able to streamline and reduce costs on our back-office operations, provided more and easier ways for clients to work with us, and maintained a “lean and mean” business structure while never compromising on client service. Our use of technology, including robo advisors to handle some of the day-to-day account monitoring and trading activities, goes back to at least 2015.
Clients will benefit from the use of tech in financial services, in several important ways. First, your costs will be (or at least, should be) lower than if you are paying a human advisor or team to manage your assets in real-time. Ours are: clients who utilize our investment models have a lower fee schedule than clients who want customized strategies and individual account attention. There are only so many hours in the day, and human advisors are limited in ways that AI isn’t (robo advisors don’t take a lunch break, for instance). The more time a particular client or account requires of our work day, the more that account will likely pay in management fees.
That’s not to say that tech makes it less likely that you’ll spend time with your advisor. In fact, we’ve found the opposite to be true. Having more of the daily behind-the-scenes task list done automatically actually frees up more time to spend with you.
Using robo technology also helps us better implement several regulatory requirements as a legal fiduciary. One of those requirements is known as best execution, which means we must try to provide fairness among all of our clients when we are making changes to investments.
Let’s say a public company issues very bad news and its stock price is collapsing. We want to get our clients out of that particular investment. Which of our clients do we attend to first? In the old days, we had to go account-by-account and place sell orders individually. But that means we’ll get some clients out early, while the stock price is higher, and others will get a worse price. Advisors naturally tried to salvage the accounts that provided the most revenue first, leaving smaller accounts to suffer. Best execution says we can’t “play favorites” (or at least, advisors are not supposed to). Using technology and a standard set of managed investment models instead of always customized and human-run asset management means we are never have to pick and choose which client accounts get the most attention and whose concerns are addressed first. Using automated functions for rebalancing, tax loss harvesting, and making wholesale changes to our investment models allow us to provide a consistent level of service for every client simultaneously, regardless of your account size.
In short, robo technology makes us faster, fairer, more consistent, on-duty 24/7, less expensive, and have more time to spend face-to-face with our clients. It lets us add clients without diluting service standards. It makes small firms like ours competitive with the behemoths. And it blesses your experience as a client.
Some clients, especially younger ones who are correctly more fee-sensitive, have felt the allure to bypass a relationship with an actual advisor and just invest directly with a robo solution. In very uncomplicated situations, and in generally positive market and economic conditions, this might be a workable strategy for investors who are geniune DIYers.
But when times get tough, insight and experience matters, and investors need real answers to complext questions. During these times, we’ve seen that robo advisors typically lose clients. In fact, for the first time since the robo-advisor concept was introduced over 10 years ago, 2022 marked the first time that the robo service industry is seeing a decline in customers. The problem is, in our opinon, that robo advisors are a useful tool, but they are not a complete solution. We think these are the top five reasons why:
Lack of Personalization
One of the biggest criticisms of robo-advisors is that they lack the personal touch that many investors are looking for. While algorithms can be effective in creating a diversified portfolio based on a user’s risk tolerance and financial goals, they cannot provide the level of personalization that human advisors can. Human advisors, simply put, can get to know you, hear your concerns, and draw professional inferences from those discussions. The robo advisor doesn’t know how to address your unique biases, preferences, hopes and fears into its system. A human advisor does.
Limited Scope of Services
Robo-advisors are primarily designed to provide generic investment advice and manage typical risk-based portfolios, but they do not offer comprehensive financial planning services that many investors need. For example, they may not be able to help with estate planning, tax planning, or retirement planning, which are important components of a holistic financial plan. Human advisors can do these important tasks and leave the AI to do with it does best: watch the markets, make appropriate trades based on rules the human advisor has given it, and alert us to trends.
Inability to Handle Complex Financial Situations
Robo-advisors are great for people who have simple investment needs, but they may not be equipped to handle more complex financial situations. For example, if you have multiple sources of income, own a business, or have a large inheritance, you may need more sophisticated financial planning that a robo-advisor cannot provide. If you have complex planning or investing situations, it is vitally important not to “step over a dollar to pick up a dime”.
Limited Human Interaction
Some investors may prefer to work with a human advisor because they value the personal relationship and the ability to talk to someone face-to-face. While some robo-advisors offer access to human advisors (almost always for an additioanl fee), the level of interaction may be limited or impersonal, which can be a turn-off for some investors. We believe the advisor/client relationship is supposed to last for many years, so that we can truly get to know you and your individual preferences and concerns, and make adjustments to the work we’re doing for you as your life’s conditions change. There is simply no way to accomplish that with a computer algorithm.
Concerns about Security
While robo-advisors have robust security measures in place to protect investors’ data and assets, some investors may still be concerned about the safety of their personal and financial information when using a digital platform. This concern is particularly relevant in the wake of high-profile data breaches and cyber attacks that have affected financial institutions and other companies, though it does not take a breach to find your information broadly disseminated. Many robo advisor and planning services sell or trade your information, which is one of the ways they can offer you their initial services at what looks like an amazingly low cost.
The best of both worlds
At nVest Advisors, we believe the best overall solution falls somewhere between traditional “all-human, all-day” investing and planning services, and a cheap, all-purpose automated solution. It’s not an either-or proposition. We’ve found that the best service model we can provide is to combine human- and robo-managed services in a way that streamlines our operations, scales our business, lowers your costs, and provides us more time to work personally with you on other matters that are important to you. The human relationship matters to an enormous degree, but the daily robo functions are equally important. It is a partnership between the two, not a binary choice of one over the other, that is the best overall solution for the majority of investors.
If you’d like to explore exactly how we integrate a deeply personal relationship with a human advisor with a high-tech, even 100% virtual experience, we’d love to show you. Feel free to schedule a complimentary 30-minute Q&A (with a human advisor), on the calendar below!
