Financial professionals see limited value in online advice & trading platforms

Robo-advising – investing in the market through various online and mobile applications – has exploded in popularity in recent years, attracting users with lower fees, easy-to-use platforms, and smaller opening balances that traditional investment accounts.

How will these automated techniques affect the financial profession in years to come? While most financial advisors tell Advisors Magazine they do see a place for robo-advisors in certain situations, they believe most Americans benefit more from personalized financial planning tailored to their own individual needs.

The robo-advisory industry is projected to exceed $1 trillion in value this year in the United States, which accounts for 75 percent of the global market. A study by InsideBitcoins.com estimates the U.S. industry will grow by 40 percent in 2020, following increases from $191.6 billion in 2017 to $757 billion in 2019. Additional research by LearnBonds.com projects the industry will reach $1.4 billion this year and $2.5 trillion by 2023. LearnBond.com also found the number of users grew five-fold from 13.1 million in 2017 to 70.5 million in 2020, and should reach 147 million by 2023.

“We live in an increasingly digital world, so the advent of these platforms makes sense,” said Michael D. Lovecchio, director of client experience and senior partner at Jacobi Wealth Advisors in Berwyn, Pennsylvania. “A whole subset of the population wants to do as much online as they can, and these robo-platforms cater to that.”

Some people could be well served by robo-advisors and similar apps, according to Judith McGee, L.H.D., CFP®, CEO at McGee Wealth Management of Portland, Oregon. McGee said the platforms can provide education to help people understand concepts such as dollar costs averaging, goal-setting for the future, and present and future value of money.

“This works well when you are in an early, uncomplicated stage of financial maturity,” McGee added “Once financial life becomes more complex, legal, tax, relationships, habits and other emotional issues are part of the planning. The apps and robos probably won’t connect with the client or serve their most important psychological needs.”

Robo-advisors, hybrids, and other apps should be considered within that framework, agreed Joseph A. Di Vito, Jr. CFP® of RBC Wealth Management in Phoenix, Arizona. Individuals with simple personal situations can use automated platforms for basic financial advice without needing to consult an experienced advisor, he noted.
“Taken out of that context, if used to ‘gamify’ the planning experience, our opinion is that software-based solutions will not provide the necessary guidance to avoid future pitfalls,” Di Vito continued, “This can lead to costly mistakes that are often difficult to recover from.”

Lovecchio sees similar risks with automated trading platforms, which generally do not provide individual coaching to help guide users’ behavior.

“If a school provided all its students a great textbook but no teacher, what would happen?” Lovecchio asked. “There would be a handful of students who read the book and thrived. But the vast majority would struggle without some coaching or some meaningful dialogue to guide them through it.”

The growth of zero-fee investment brokers and such popular technologies as the Robinhood trading app are luring more people away from traditional investment methods. These techniques use complex computer algorithms to manage portfolios, based on such client factors as risk tolerance and their investment windows. With lower barriers to entry and greater convenience, robo-apps are drawing in new clients that often have not sought conventional planning and investment services.

However, financial professionals are currently more concerned about human competitors than online ones, according to a 2020 survey by Natixis Investment Managers.

Sixty-two percent of advisors said they consider other financial planning firms as their main competition today. Only 16 percent of those surveyed identified automated do-it-yourself (DIY) tools as their most significant competitors, while 10 percent classified automated advice platforms as their main challengers.

However, five years from now, most advisors surveyed by Natixis expect technology will be a more significant factor. By 2025, only 20 percent of professionals expect traditional advisors will still be their main competitors. More than 30 percent anticipate industry disruptors (such as Amazon, Apple, or Google) entering the market to provide high-tech financial advice as the largest threat. More advisors also expect their main rivals will be automated DIY tools (25 percent) and automated advice (21 percent) than have that concern today.

Despite the allure of flashy interfaces and gamified apps, research indicates most Americans still prefer dealing with human beings for financial planning advice. A 2020 online Harris Poll survey commissioned by NerdWallet found 84 percent of people prefer working with a real person, versus 16 percent favoring a robo-advisor. Almost half of those surveyed who use a human advisor said they feel confident that their investments will grow, versus only 34 percent of robo-advisor users with an optimistic outlook. The Harris survey also found 51 percent of Americans want the ability to talk with a live person. Another 31 percent expressed concern that robo-advisors are unable to consider investors’ individual situations when making recommendations.

“We believe people will always need a holistic plan that takes into account many factors,” Lovecchio said. “A digital platform simply can’t account for the random critical financial events that a client must plan around for a successful long-term result.”

Di Vito agreed that individuals and families with more complex financial situations will continue to seek quality, experienced, professionals. Those advisors can also collaborate with clients’ tax and legal advisors to develop and maintain comprehensive plans, he noted.

He added that he has rarely heard clients express concerns about using online and mobile platforms. A priority for his firm is to continue evolving its own technology to better provide client service.

“We see the robos and hybrids serving the gap between those who have significant wealth they want to protect, and those who would like to start on the road to getting there,” Di Vito said. “Once individuals have built significant wealth and their cases become more complex, they outgrow these offerings. One-size does not always fit all.”