Many of us are comfortable with trusting a computer to manage our wealth in the form of robo-advisors. But can automatic investing tools ever replace human financial advisors?
How does a Robo-advisor work?
Before answering the main question, let’s understand how robo-advisors work.
Robo-advisors rely on algorithms to choose assets for you to invest in. To do this, robo-advisors ask questions in order to determine your appetite for risk. Give the impression that you’re risk averse and your suggested portfolio will likely allocate you a high number of bonds, which are less prone to steep falls.
On the flip side, if your answers suggest that you’re more open to risk, you’ll probably be allocated a greater number of shares. This is because shares are more volatile than bonds, but offer higher potential returns in the short term.
Robo-advisors essentially do the work for you, so you don’t need to have any real investing knowledge to use them.
How popular are robo-advisors?
Reports suggest that automatic investment tools managed $460 billion in 2020. This figure has grown by a massive 30% since 2019.
Furthermore, a recent Vanguard survey in the United States suggests millennials are twice as likely as baby boomers to consider using a robo-advisor. The survey also mentions that the majority of millennials and Gen Z see robo-advisors as a ‘convenient’ way to invest.
Is it worth opening a robo-advisor account?
Aside from the convenience factor, Robo-advisors offer a number of other benefits.
With a robo-advisor, you don’t need to pick and choose your own investments. This can be a boon for those who know little about investing. A robo-advisor also allows you to save tax free. To do this, make sure you open an account within a Stock and Shares ISA wrapper. Transparent fees are another plus, which may not be the case with other investing solutions.
For more on these positives, as well as the drawbacks, see our full article on the benefits of a robo-advisor.
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Can robo-advisors replace financial advisors?
Now we’ve touched on the benefits of robo-advisors, what is the likelihood of them replacing financial advisors?
To answer this question, it’s important to outline that robo-advisors essentially target two customer groups:
- Those with limited knowledge of investing (see investing basics to grow your knowledge)
- Those who want to passively invest
Human financial advisors also target those with limited knowledge of investing.
However, a key difference is that human advisors also target those who seek to actively invest their wealth. This means that if you want someone to pay close attention to your investments, a robo-advisor may not fit the bill.
For more on the two main types of investing, see our article on whether active vs passive investing is better.
Financial advisors can offer emotional guidance too
As well as offering a way to actively invest, human advisors are better at understanding emotions. For example, if you are planning a life-changing event, such as a wedding, a human advisor can offer tailored advice to suit your circumstances. This may involve increasing your holding of bonds to minimise the risk of a market crash affecting your plans.
While a robo-advisor may ask intelligent questions based on your risk appetite, trusting a computer to react to your specific investing goals – especially those with an emotional connection – may prove more tricky.
On this front alone, it’s likely that the demand for human financial advisors will continue.
However, if you are looking to actively invest, there’s nothing stopping you from picking and choosing investments yourself, cutting out the middleman.
If this appeals, take some time to explore the best share dealing solutions.
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