Comparing the Value of Human Advisors and Robo-Advisors

School of Financial Wellness

An image indicating robo-advice and human advisors will be compared.

In 2008, robo-advisors emerged as an inexpensive alternative to traditional financial advice. This type of service typically uses algorithms to imitate traditional financial planning techniques such as choosing and managing investments.

Over the past decade, these robo-advisors have entered the mainstream but are they performing as well as their human counterparts? Recent research seeks to answer this question, and the results may be surprising.

Do Human Advisors Outperform Robo-advisors?

New research compares the value that investors perceive from human advisors and robo alternatives. The three areas studied were portfolio value, financial value, and emotional value.

Investors Perceive More Portfolio Value from Human Advisors Compared to Robo-advisors

Portfolio value includes activities like selecting securities, balancing risk with return, managing taxes, minimizing fees, and trading. This type of value can be measured based on an improvement in average annual investment returns. Based on investor estimates, human advisors increase average annual returns by 5% while robo-advisors only add 3% annually to returns.

Investors Perceive More Financial Value from A Human Rather than a Robo-advisor

Financial value includes traditional financial planning techniques like optimizing saving and spending, managing debt, maintaining adequate insurance coverage, and crafting an estate plan. These activities help investors plan and reach their financial goals.

Investors with human advisors estimate that they are 16% closer to achieving their financial goals than they would be without an advisor. On the other hand, investors with robo-advisors estimate that they are only 5% closer to reaching their goals than they would be without an advisor.

Data Source: Vanguard

Investors Perceive More Emotional Value from A Human Advisor Than a Robo Alternative

Emotional value provided by financial advice includes trust in an advisor, confidence in a financial plan, and a sense of accomplishment when reaching financial goals. Investors estimate that 25% of the value they receive from a human advisor is emotional, while only 18% of the value derived from a robo-advisor is emotional.

The Bottom Line: Investors Prefer Human Advisors

In short, investors perceive more value from their relationship with a human advisor than a robo-advisor. This is evidenced by investors’ willingness to switch from one option to the other. More than 90% of investors with human advisors say they would not consider switching to a digital alternative. On the other hand, 88% of investors with robo-advisors would consider switching to a human advisor in the future.

How do human advisors provide more value?

It is difficult for robo-advisors to replicate the value that human advisors bring to the financial planning process. Human advisors create this value using a combination of technology and a personal relationship.

Human Advisors Interpret Data Derived from Algorithms

At first glance, it may seem like robo-advisors have a technological edge. After all, technology is the main selling feature of robo-advice platforms. However, most human advisors have access to similar algorithms that robo-advisors use to make their decisions.

When a human interprets data from various sources, they can supplement the results of the analysis with data from their own experience. On the other hand, a computer will interpret data as it was programmed to do. This means that new information that has been introduced to markets may not have been included in the robo-advisor’s algorithm, but a human advisor could process this information real-time to adjust your portfolio. In the future, robo-advisors may become more efficient at digesting new data and adapting real-time, but for now, this technology is not accessible to average investors.

Human Advisors Know You

During the account opening process, both a robo-advice platform and a human advisor may ask similar questions about your net worth, goals, and risk tolerance. These simple questions can be an important first step in crafting a financial plan. However, human advisors are better able to ask follow-up questions, clarify your answers, and dig deeper to quantify your goals and risk tolerance than their robo-advisor counterparts.

Technology has come a long way, and many AI platforms can give the impression of a conversation. But don’t be fooled, as these platforms are usually limited in the questions they ask. A human advisor can follow the natural flow of conversation, uncovering needs that a robo-advisor may not be programed to discover.

Human Advisors Have an Advantage in Complex Situations

Your financial picture can be complicated. In addition to choosing appropriate investments, you should work to minimize taxes, ensure you have adequate insurance coverage, craft a comprehensive estate plan, and have a plan in place for drawing from your assets to maximize the longevity of your funds.

Balancing these needs is a complex task and requires significant experience and knowledge in each area of financial planning. A human advisor can help you create a wholistic financial plan that considers more than just investments. Taking this a step further, a wealth management firm with a team of tax, legal, and investment professionals can provide the knowledge you need to reach your financial goals.

Advice You Can Trust, Backed by the Latest Technology at Meld Financial

The relationship you build and the advice you receive from an experienced financial advisor is difficult to replicate with an algorithm. So, when deciding who to trust with your hard-earned funds, turn to the team of tax, legal, and investment professionals at Meld Financial.

Throughout more than 40 years of managing our clients’ wealth, the team at Meld Financial created Financial Fingerprint™ – a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change. Financial Fingerprint™ combines data-driven analytics with human interpretation to create a plan that adapts to your goals, your risk tolerance, and your specific situation. With Financial Fingerprint™ and an ongoing relationship with our experienced team, you can have confidence in your financial future.

To learn more or get started today, contact us.

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