The Importance of Digital Engagement:

In five years’ time, how do you anticipate the importance of “enhanced access through digital channels” changing in your private client relationships?

The Importance of Digital Engagement: In five years’ time, how do you anticipate the importance of “enhanced access through digital channels” changing in your private client relationships?

One trend in the field of investment advice doesn’t even involve a human financial adviser — the advent of the robo adviser, an online platform that takes in personalized information about you and spits out investment suggestions.

Robo advisers are not a one-size-fits-all proposition, as the choices range from a strictly online platform to a hybrid model in which a human adviser is also available to help clients with their financial planning needs.

Experts say robo adviser platforms offer a lower-cost alternative for investors whose finances are relatively simple and straightforward, but the option may be less effective for people who have a more complex financial situation.

Single-Purpose Analysis

Robo advisers are most effective in cases where the investor has a single financial goal, said Tom Warschauer, professor emeritus with the Fowler School of Business at San Diego State University. However, when an investor has multiple financial goals, the artificial intelligence systems behind robo advisers are not as good at allocating resources between those competing goals.

“There are all kinds of holes in the AI (artificial intelligence) systems if you think of them as comprehensive planning tools, but if you think of AI as a single-purpose analysis, they’re really good at that,” Warschauer said.

When an investor logs into a robo adviser platform, he or she will be asked to fill out a questionnaire to determine such factors as the investor’s time horizon, financial goals and risk tolerance. The system’s algorithm then determines which specific investment funds might be a good match for the investor. Fees are often charged on an annual basis as a percentage of the investor’s portfolio, and they are often less than the fees charged by professional investment advisers.

Bob Dannhauser, head of private wealth management with the CFA Institute, an organization for wealth advisers, said the robo adviser sector is still in its early stages, but the concept can potentially become a larger force in the arena of investment advice, especially for clients with assets below $1 million.

Such an option can be a good one for people of more modest wealth, who are looking for a less expensive source of investment advice. When it comes to people with greater wealth and more complex financial needs, he said, “The jury is still out.”

Hybrid Systems

Hybrid systems are becoming more common, he said, in which clients can do some things online, but still talk to an adviser when they want or need to.

“When it’s done well it makes the client experience better,” Dannhauser said of robo advisers. For example, he said, “People can do paperwork on line without losing the significant benefit of actually talking to someone.”

According to the website Investopedia, the top five robo advisers for 2018 include Betterment, Personal Capital, Schwab Intelligent Portfolios, SigFig and Wealthfront.

A number of large financial institutions also have their own online platforms, such as Merrill Lynch’s MerrillEdge, Prudential’s LINK, and Fidelity Go. TD Ameritrade also offers an online investing platform.

Warschauer said he can envision a future in which robo advisers are programmed to help their human clients rein in counter-productive investing instincts, such as pulling out of the market immediately after a downturn, or buying at the peak of market euphoria.

“We know people’s instincts financially are as good as their eating habits,” Warschauer said. “What people like to eat is usually bad for them, and the (financial) decisions people like to make that are comfortable for them are usually bad decisions.”