Financial planning is entrusted to investment managers at local banks and other financial firms before the development of robo-advisors. Today, traditional financial advisors use digital platforms and online tools to deliver services to their clients.
With the advancement of technology, can robo-advisors replace human financial advisors? This article would discuss what robo-advisors are and what their benefits in financial planning and managing.
What Are Robo-Advisors?
Unlike traditional financial advisors, robo-advisors leverage technology and take a tech-first approach to provide money and investment management services through proprietary online platforms and mobile apps.
How Robo-Advisors Work?
Robo-advisors provide an automated investment portfolio by collecting relevant client information and then recommending an investment allocation. The best robo-advisors promise to produce great returns.
In general, the allocation is based on the investor’s age, so higher stock allocations go to younger investors and older investors are offered higher bond allocations. When the account is created and the allocations are set, the investor can transfer money and the robo-advisor would invest it across the targeted investment portfolio.
Advantages Of Having Robo-Advisors
Here are the benefits of using robo-advisors to help you determine if they can replace human financial advisors:
1. Robo-Advisors Offer Research-Backed Portfolios
Investors might be adamant to use robo-advisors because they still trust and rely more on human intelligence far more powerful than any machine. To address this concern, robo-advisor companies boast Modern Portfolio Theory (MPT).
Efficient Frontier established MPT, the Nobel award-winning theory for investment portfolio construction, offering the highest expected return of investment with the lowest level of risk.
MPT weighs the risks and rewards to determine the maximum possible returns. Human financial advisors are experts and they also evaluate these to maintain an appropriate level of risk, but the difference is in the speed and data accuracy.
2. Robo-Advisors Are Low Cost
Traditional financial planning services come with a price. For robo-advisors, investors enjoy low cost because of varying price structures far below traditional costs. Because of automation technology, robo-advisors also offer lower fees.
3. Fast And Convenient
Robo advisors deliver financial management services through automation with limited human interaction, mostly through their websites and apps. On the other hand, human financial advisors require phone calls, consistent communication, and in-person meetings.
4. Great Features
When choosing the right robo-advisor for you, it’s important to consider the reputation of the platform. Check reviews and get real updates from verified users. Of course, don’t forget to check the features the platform offers.
The best features to look for in a robo-advisor include the following:
- Retirement planning and simulation
- Hybrid robo-advisor offering similar services of human financial advisors
What Human Financial Advisors Can Offer
Financial advisors have the credentials such as the Certified Financial Planner (CFP). They’re educated and well-experienced in the field. And unlike robo-advisors, they can offer more than investment advice. Human financial advisors can offer their opinions on investment management, tax advice, retail banking, and estate planning services.
Robo advisors implement a mass-market approach using a pre-defined category depending on the client’s investment situation and recommend an investment plan.
Can Robo-Advisors Replace Human Advisors?
Robo-advisors can replace human financial advisors in terms of setting investor account and setting allocations. When it comes to speed, data accuracy, and financial planning, they’re designed to provide investors the maximum return on their investments.
But did you know that robo-advisors also have a human touch? Professional human advisors are the ones who create processes and platforms, defining a robo-advisor’s planning and strategy. These professionals continuously research strategies robo-advisors use.
Both human advisors and robo-advisors are important in financial planning. The difference is that investors don’t get to communicate with people anymore using robo-advisors.
Robo-advisors are highly suitable for the following types of investors:
- Tech-Savvy Investors: If you’re tech-savvy and you appreciate digital means of investing your money, robo-advisors are highly recommended for you.
- Hands-Off Investors: If you’re too busy to answer calls and meet advisors, then robo-advisors are suitable for you.
- Long-Term And Low-Cost Investors: If you want to build a long-term investment portfolio, robo-advisors are the best. You can save money from professional fees while maximizing your return on investment.
- Combination Investing: If you want to try both, you can use robo-investors as a reliable backup to your human-managed investments.
Investors now have an idea why robo-advisors can replace human financial advisors in terms of managing their money and investments. Traditional financial investors still play a big role in financial planning but are more at the back-end. Investors can rely on the abilities and data of robo-advisors because they've been designed by human financial advisors themselves.