Welcome to Financial Advisor IQ


Four Things Robo Advisors Can't Do for Your Clients

February 1, 2018

Technological advancement is sweeping through the financial services industry. In particular, "robo" advisors have surged in popularity. These automated investment platforms, which use algorithms to make investment recommendations, are especially appealing to beginning investors.

But for most investors, robo advisors are inadequate. They lack the insights, experience, and emotional intelligence needed to help investors make critical investment decisions. Let’s take a look at four reasons why it’s important for retail investors to work with a human advisor like you.

1. Robos don’t have emotional intelligence

No matter how technology continues to evolve, interpersonal relationships will always lie at the heart of financial services. A robo advisor may give people real-time market updates and statistical analysis, but it lacks the emotional intelligence needed to handle plans for retirement, a child’s education, buying or selling property, and other major life events like a human can.

A human advisor is also more likely to have foresight and the ability to look to the future. Robo advisors offer convenience and control, but those same qualities may drive an investor to sell or buy based on emotions instead of sound logic and big-picture insights. A human advisor can explain the nuances of market trends and prevent clients from making reactionary decisions in volatile times.

2. Robos don’t know the investor

Robo advisors determine investing strategies by asking a few questions and then grouping the respondent in with other investors. They limit the investor’s ability to make manual adjustments to a strategy, leaving the investor with a plug-and-play strategy that isn’t tailored to his or her specific needs. Also, robo advisors typically don’t allow investors to trade individual stocks. Having to use a brokerage to do so undermines the robo advisor’s initial purpose altogether.

A human advisor, on the other hand, will build the client’s investment plan around his or her tax considerations, future plans and expenses, personal financial goals, and many other factors. They can also recommend new and innovative investment opportunities, a function of which robos aren’t capable.

3. Robos are not financial planners

Robo advisors can be great for new investors with smaller accounts. But if an investor is trying to maximize their retirement savings or manage a complex portfolio, robo advisors leave them largely to their own devices.

Robos cannot take into account an investor’s full financial profile, including assets held elsewhere (such as employer-sponsored retirement accounts). Nor can they offer other services, like trust management or estate planning. While the low fees certain robo advisors offer may be tempting, the expertise of a human advisor typically pays for itself in the long run.

4. Robo advisors are not accountable

Good financial advisors act in their clients’ best interests. They stake their reputations on their clients’ successes. In turn, they’re held accountable if they make mistakes. Robo advisors may not be subject to the same level of human error, but if a glitch in the system results in a mistaken purchase or sale, who is responsible?

Robo advisors may work for some, but for the vast majority of investors, they simply cannot replace a long-term relationship with a real-life financial advisor. And while advisors should make full use of the technologies available to them, when it comes to building a comprehensive investment plan, human relationships will win out.