The future of robo-advisors and human advisors
Artificial intelligence now allows investors to employ robo-advisors for simple and regular portfolio management. Time will tell how well a tool based on algorithms can perform steps that require discretion and experience.
What is a robo-advisor and how do they work?
Digital and online investing options are currently hot topics in the financial industry. There’s special interest in artificial intelligence-driven, robo-advisors that offer financial advice and manage investments with limited human intervention.
Typically, a robo-advisor ‘asks’ questions through an online survey about your preferences, risks, and goals, and uses algorithms based on that information to provide guidance and automatically invest for you.
Pros and cons of robo-advisory
There are some benefits to robo-advisors, such as easy account setup, account services, and in some cases, low fees. Robo-advisors make investment decisions using software designed to automatically adjust a portfolio to best align with a client’s outlined goals.
Robo-advisors also come with risk, including technological glitches, and misinterpreting what a client wants or needs. Perhaps most importantly, robo-advisors haven’t yet replaced a human portfolio manager’s discretion, especially when a client faces life-changing moments, illiquid assets, and business or family governance issues.
The convenience of managing your investments with little human intervention and at a reduced fee may be appealing; however, there are fundamental questions to consider.
Will digital advice stand the test of changing market cycles? Can robo-advisors predict events and help clients pivot during life-changing moments? Can it replace the role of other professionals like portfolio managers or trustees?
"A robo-advisor is an interesting concept, and as technology advances, we might see strong evidence of value. It might be a good idea that until then, investors work hand-in-hand with their portfolio manager as they delve into this new financial tool."
Director of Portfolio Management, Huntington Private Bank ®
Who should–or should not–use a robo-advisor?
Because some robo-advisors can be used at no cost and low starting balances, they could be attractive to new investors who are just getting started. Those who’ve grown up with the internet and are typically digitally savvy may find robo-advisors easy to use, perhaps even entertaining, with very intuitive user interfaces.
Those holding expansive, complex portfolios may decide to avoid a robo-advisor, which have limited flexibility and don’t create or monitor comprehensive plans. Robo-advisors may be based on modern portfolio theory, assuming that all stocks are correctly priced at all times. That works well in theory, but not always so well in the real investing world.
Not so fast
Humans can likely better exercise discretion and account for circumstances like we’re facing today, and that’s why trustees and portfolio managers can be valuable. It’s hard to imagine a future with a robo-advisor making decisions involving tumultuous events, such as COVID, international warfare and global inflation.
Can we expect future technology to supplement trustees’ discretionary decision-making processes? Absolutely. In the end, technology will likely help trustees better perform their responsibilities. It just doesn’t seem that technology will replace humans exercising discretion—at least not for now.
Digital and online financial tools can streamline simple tasks and research, but robo-advisors can’t yet replace the experience and discretion of a real live human. To learn more about discretionary investment management solutions, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank® Office near you.
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