Credit: Shutterstock photoIn an age of rapidly advancing technology, more investors are opting for DIY financial planning and investment management platforms. These trading platforms, retirement calculators, and auto-rebalancers are increasingly sophisticated, but many investors will learn in the next major market meltdown that there is a human element that cannot be replicated by even the most advanced of these tools. (See also: Can You Really Trust a Robo-Advisor?)
Here are the top four reasons that robots are bad financial advisors:
1. They Neglect the Emotional Side of Investing
One misconception about financial planning and investment management is that it’s all about math, charts and logic. While these things are part of investing, they don’t encompass the whole story; proper logic is only about half the battle. The other half deals with something totally opposite of good data, which is emotions.
Many of the conversations that happen between a human advisor and their client consist of emotional topics. Emotion is what drives our financial goals. It's the motivator behind why we save, why we endeavor to leave more to the next generation, and why we want to take care of our spouses.
When a person reflects on the journey of their working years, all the challenges that came along with it, and all of the sacrifices that were made to get to the point where retirement is now an option, it becomes emotional. Robots are not equipped to account for unique human emotions in their algorithms. (For more, read: How to Avoid Emotional Investing.)
2. Robots Cannot Relate During a Volatile Market
The same strategy recommended by a robo-advisor, and by a human advisor, may experience the same level of volatility. But, a robot can't share a story to give you perspective. They can’t show you empathy. They can only offer the cold, hard facts.
The most seasoned advisors will prepare their clients for volatile times in a proactive way as a strategy to prepare clients emotionally. That way, when volatility shows up, the clients will be more likely to remain calm, and not sell off as a result of their fear.
Some of the most valuable advice given to clients during market corrections is to avoid panic selling. This feat can be difficult even for an advisor with a long-standing relationship with the client. How will the DIY client take the pre-packaged, automatically triggered message of the robo-advisor?
An adept advisor should not only make prudent recommendations, but they should communicate those recommendations in a way that builds confidence. In hard times, a good advisor should provide emotional support by relating to the client.
After all, most advisors certainly have personal investments as well. As clients are experiencing volatility, a human advisor is probably experiencing similar results in his/her own portfolio. Perhaps this may help provide additional comfort to clients during hard times in the market.
3. Robots Can't Correct Bad Input
Many robo platforms are built on a simple system. You input the data and that data generates output. But, what if the individual answering the initial questionnaire doesn’t know how to properly answer the questions?
For example, almost everyone wants maximum growth, but not everyone wants maximum volatility. And almost everyone wants safety, but not everyone wants to sacrifice upside potential for that safety.
A robot cannot discern the difference. A robot can’t listen to your tone, can’t read your body language, and can’t redirect you. Bad or incorrect input could lead to mismatched or poor investment outcomes.
4. A Robot Can't Take Care of Your Family
In many cases, when a DIY investor is married, their spouse has little to no understanding of how to manage the family’s assets. If they're deceased, the surviving spouse would not only be left with the emotional challenges of losing a loved one, but also with the grueling task of completing death claim forms, retitling assets, and taking over the management of the investment portfolio.
If the surviving spouse has no interest or ability to manage the portfolio, or if they're not comfortable utilizing a DIY platform, they would also be charged with the task of searching for, interviewing, and choosing a new advisor to work with. For someone with little to no investment knowledge, this may prove to be difficult and overwhelming. (See: How to Select a Financial Advisor.)
Consider Carefully Before Committing to a Robo-Advisor
When things go as expected, DIY investing on a robo platform seems like an obvious choice. However, if you’ve been around long enough, you know that life, like the stock market, is all about managing the unexpected.
Some individuals are capable of managing the unexpected by themselves, or with the assistance of a robo platform. For others, the pros of a robo-advisor may not outweigh the cons during times of life change or market volatility. Either way, before you choose a robo-advisor as the strategy for you, it’s important to understand the potential downfalls of this choice. (For more from this author, read: Should Aging Parents and Children Co-Own Assets?)
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This article originally appeared on Investopedia.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
