Why robo-advice won’t be taking over the world just yet

By November 11, 2020Financial Planning
Robo advice vs financial adviser

Trusting your finances to a digital investment platform might be cheap, but you can’t put a price on the peace of mind that personal financial advice gives you.

Technology has had an outsized impact on our lives for several years now. Every time you use a computer, your mobile phone, or take a trip in your car, algorithms are there, behind the scenes, helping to shape your decisions, whether you realise it or not. Algorithms even choose what we see on social media, they dictate which films we watch on Netflix, or what ends up in our basket when we shop online.

But when it comes to providing financial advice, algorithms are still lagging behind. Back in 2015, the introduction of ‘robo-advice’, which relied on computer-generated investment portfolios, was predicted to spell the beginning of the end for financial advisers. But five years later, although we have all grown used to doing most of our daily activities online, the machines don’t look like they’re winning this particular battle.


So, what exactly is robo-advice?

As you would expect, robo-advice is an online investment service where clients are asked a number of questions, including how much they wish to invest, how long they plan to invest the money for, and their general attitude towards risk. The answers to these questions are then used to invest the client’s money into one of several available investment portfolios. The money is then managed digitally for as long as the client wants to remain invested.


What are the positives of robo-advice?

First of all, robo-advice promises to keep the cost of the investment lower than you would expect if you tried to manage a diversified portfolio of investments yourself, or through a financial adviser. And by keeping things simple, it’s a very quick process to get a portfolio up and running. Once the questions have been answered, the client can have their funds invested within a day or so. For investors who have relatively small amounts to invest, it’s a good way of setting aside regular amounts without having to worry too much about keeping an eye on the investments.


What are the negatives of robo-advice?

Despite the name, robo advisers don’t usually offer financial advice. They use algorithms to know just enough about someone to place their money into a particular savings pot, but that’s about the extent of their ability to solve clients’ financial problems. For most people, robo-advice can only get them so far.


Why is robo-advice limiting?

If the events of 2020 have taught us anything, it is that life is unpredictable and sometimes more complicated than we would like it to be. The companies that offer robo-advice to customers want to convince people that financial advice can be stripped down to a computer-generated, algorithmic ‘paint by numbers’ approach. But the reality is that people’s needs are usually far more complex.

One of the most valuable aspects of having a relationship with a financial adviser or financial planner is that it goes far beyond just recommending and overseeing a specific investment.


It pays to have someone to talk to about money

Most people have an emotional relationship with money. Financial issues are the number one cause of arguments rows between married couples. It gives people sleepless nights, and can have a significant impact on their mental health. So, having a financial planner to talk to, someone to listen to your financial needs, hopes and fears, is still an essential part of the advice process – and not something that an algorithm can deal with (yet).


Keeping calm during a crisis

One of the ways that financial planners can really demonstrate their worth is through the value of their experience. This has been a strange year in investment terms. In the early months of the year, when the coronavirus pandemic – and subsequent lockdown – became a global threat, stock markets plunged in value. Inexperienced investors, or those without a financial adviser, often respond in times of crisis by selling their investments, and crystallising their losses.

But a good financial planner can take the emotion out of your financial decisions, help to put ‘apocalyptic’ media headlines into perspective, and make sure that your portfolio is best-positioned to take advantage of recent stock market falls, while also capitalising on longer-term trends. Financial planners can help to reduce the overall risk within your investment portfolio by recommending sophisticated investments, such as tax-efficient Venture Capital Trusts or Enterprise Investment Scheme plans, that simply aren’t available on robo-advice platforms.

In short, during volatile investment conditions, financial planners get the opportunity to get creative, demonstrate their experience and specialist skills, and to really prove their value to their clients. A robo adviser portfolio will just carry on regardless.


Financial planning that goes beyond investment

And of course, investment advice is just one aspect of what our financial planners do. The questions we ask during our fact-finding stage are not just restricted to finding out how much you want to invest and for how long. We are more interested in hearing you talk about your life goals, your plans for your retirement, the wealth you want to pass on to your children and grandchildren. We’re asking these questions because we want to help you plan your financial journey through life. All this information helps us to create a much deeper, lasting relationship with our clients throughout their relationship with us. And it means we’re ready to help when something unexpected happens.


Summary: a matter of trust

While algorithms have improved our way of life in many areas, often in areas we’re not even aware of, it’s also becoming more apparent that algorithms can themselves be flawed or contain hidden biases – after all, they are still programmed by humans.

The lack of take-up of the services offered by robo-advice companies suggests that most people are still deeply sceptical about leaving their financial future in the hands of computer programmes that don’t understand them or care about them.

For some people, using digital-only robo-advice is a cost-effective and simple way to start setting money aside for the future. But for the vast majority, there’s really no substitute to having an experienced financial planner giving you the confidence to make better informed investment decisions. When it comes to the really important questions, or those life-changing decisions, people will always prefer to talk to someone they trust. So, here’s our prediction for the future: financial planning will always be a people-first business.


If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

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