There is no doubt in the fact that the future of the world depends on technology. We have already started seeing the transition to automated electric cars, devices that work on voice commands, and the invention of humanoids like Sofia. The financial world is not far behind either. Robo-advisors have been a common topic for debate. Many investors have used them and found them productive. However, most of these investors have also pointed out their limitations. The notion that technology can never outdo human touch is not just a mental block. It is true to a large extent.
Here are 5 reasons why robo-advisors currently cannot do a job as well as humans financial advisors can:
One the most attractive features of a robo-advisor is its low fees. People think that they can save up on commission charges and use this money to save or invest further. This may be true in the case of basic investments. However, when it comes to understanding an investor’s changing needs, goals, and limitations, a robo-advisor lacks the ability to comprehend. With changing market situations, investors often experience fear, anxiety, and panic. A human financial advisor can guide individuals through these uncertain times with timely advice and assistance. They can help investors look at the wider horizon or cope with their losses by understanding the dynamics of the market.
Robo-advisors are built on software that take an investor’s financial query and give out a suitable answer. They are not equipped to handle complex issues that sometimes arise out of emotional issues.
The Coronavirus pandemic is a good example of insufficiency in a market lull. With the economic effects of the pandemic, most financial plans and goals have been disrupted. The normal that everyone knew of has been overthrown with the world markets crashing. The future seems different and equally ambiguous. In such times, the only thing that can help is human intelligence, given that algorithms are currently only based on past trends. They pick up cues on how the markets performed in the earlier years to predict the returns on an instrument in the long run. But when something as unexpected as a world pandemic hits the globe, they are likely to fail. Many investors have lost their jobs or have not received their full salaries in the last few months. The prices have also gone up, making their monthly expenditure rise regardless of their income. A financial advisor offers an edge over robo-advisors in this situation. They can understand the repercussions of losing a job. They can also gauge an investor’s current state of mind and other responsibilities better. Based on their observations, they can help individuals draft a plan that is not only effective but also suitable to their unique requirements at a given time.
Investments have a way of surprising individuals. Irrespective of all the caution and research, whenever one invests in the market, they always expose themselves to a certain degree of risk. But, financial advisors can explain this risk to investors, and make them see how it affects their portfolio. A financial advisor can also suggest a combination of investments that can counter balance the overall risk. A robo-advisor, on the other hand, is not as incapable of comprehending an investor’s real risk capacity. Their judgement of risk is one dimensional as they can only suggest the pros and cons of an investment. But they are not able to draw an appropriate connection to a person’s other investments, current income, financial liabilities, etc. A financial advisor will know that a child is about to go to college in a few months, so this may not be a good time to place riskier bets. But a robo-advisor is currently unable to see these aspects. Robo-advisors are marketed as guaranteed products, but they do not always deliver results because of their lack of human empathy.
A financial advisor wears many hats. They offer assistance on insurance, estate plans, emergency funds, debt control, investments, retirement, college savings, real estate, etc. However, most robo-advisors are fixated on investment and retirement. They are currently not able to include many other life events that affect a person’s financial worth. While investing and retirement savings are some of the most important goals in life, they are of little use if one is grappling with debt.
A financial advisor can suggest ways to control debt, invest in a way that the surplus returns can be used to clear loans, and enforce the importance of maintaining an emergency fund. They can also help in taxation. Many people focus on making money, but they leave out taxes and inflation that can diminish the value of their earnings. Financial advisors can find ways to navigate through these obstacles. For example, one may want to find ways to invest an inherited estate or help understand how they can incorporate their investments into their estate, while understanding the tax implications on their current financial standing. Such complex matters can be handled by a human.
For people just entering the world of investments, robo-advisors can be a good stepping stone. The investor has very little work to do. They can simply add their details, select their preferences, and the robo-advisor takes care of the rest. This method can be helpful for career starters with very little financial liabilities and family responsibilities. However, as one grows in their life and career, their financial anxieties also increase. The income rises and so does the debt. There are insurance premiums, pension contributions, medical plans, and mortgages that need attention. An investor in their 40s and 50s is likely to venture into advanced investment tools like a combination of stocks, bonds, commodities, derivatives, etc. All these instruments function differently. A financial advisor can explain the benefits and risks involved with them and also the right time to venture into each of these based on the investor’s age and other needs. A robo-advisor's advice is basic in comparison.
Robo-advisors may be marketed as an invention that is here to stay for good, but they still have a long way to go. There is no harm in trying one for basic investments. However, when it comes to establishing a wholesome financial plan, there is currently no substitute for a financial advisor. A person’s entire life’s security and stability is dependent on their financial plan. Therefore, having a person that one can talk to, discuss, and ask questions is a better alternative than a chat box based on algorithms.
For personalised and competent advice on economic matters, you can reach out to Financial Advisors.
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