The rise of popular robo-advisor platforms, such as Wealthfront and Betterment, which provide automated, low-cost investment management services, leaves many people wondering if the age of financial advice from actual humans is on its way out. This is not the case, according to some recent industry studies. Although there are fewer associated costs, millennials prefer the services of an in-person advisor.
A recent survey of millennials actively saving for retirement asked them about their use of a traditional robo-advisor versus a financial advisor. The results determined that: "Traditional advisors are nearly two times more prevalent amongst millennials than robo-advisors." This is despite the fact that there are typically higher fees associated with traditional financial advisors.
Part of what draws millennials to prefer to work with advisors face-to-face is the process of financial planning. A human advisor can help clients prioritize and track their goals and adapt as their lives change. This inherently builds a relationship that extends beyond just the nuts and bolts of investing. Here are four advantages that traditional advisors have over robo-advisors.
1. Human emotions
Emotions may be the single most defining aspect of humanity, as a life without emotion carries no substance or meaning beyond its stark physical existence. This is by no means an attempt to wax poetic or delve into some deep philosophical discussion, but it is meant to convey the power and influence our emotions have on our everyday decisions, especially our financial ones. The truth is, we each have an inherently emotional relationship with our money. Have you ever been broke? Have you ever experienced a windfall of cash? Think back to the emotional response you had to these events and the decisions those emotions spurred you to make. Were they rational?
This is where a traditional financial advisor truly takes the cake over a robo-advisor. Robo-advisors only have one job — use algorithms to manage your investment portfolio. They are not designed to manage the emotional component of investing and building wealth. For traditional advisors, this is a daily role they fulfill. When markets decline or clients experience an important financial event, the traditional advisor is there to talk them down off the proverbial ledge and help them make a rational decision void of strong emotions.
"Accountability is the glue that ties commitment to results." This Bob Proctor quote does a great job summing up the importance of accountability in one sentence. Without accountability, results are difficult to come by. Certainly, many people are capable of holding themselves accountable on their own, but having someone else committed to helping you in the endeavor only ups your chances of success. In terms of achieving your financial goals, the traditional advisor yet again wins the race. Computers are certainly capable of creating tasks and sending you reminders, but they have little to no flexibility in helping you devise an accountability system that truly works for you and is tailored towards your specific goals.
Let's face it; over time our lives can change quite drastically. We inherit money, we lose a job, we buy a house, we have kids. The list goes on and on. Each of these events creates what we call "money in motion." When money is in motion, planning, adjusting and taking thoughtful action needs to occur in order to ensure a positive outcome. Over time, many discussions are required during this process, and having a human expert helps you adjust and adapt as needed. And can make all the difference in the world in your success. Robo-advisors, on the other hand, operate solely on algorithms, making them inherently less flexible.
4. One-size-fits-all vs. tailored service
Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations. Rather than being built and catered specifically to you and your current financial situation, robo-advisors are designed to serve the masses. This means a somewhat cookie-cutter, one-size-fits-all approach in their offerings. Traditional advisors, on the other hand, can tailor the services and investment management style they provide according to your unique financial situation.
The robo-advisor versus financial advisor debate may never be settled, and will likely continue to accelerate as more technology is incorporated into the financial services sector. At the end of the day, a robo-advisor provides a service to a select group of clients, and financial advisors provide services to a different group. Each cater to the preferences of their unique clientele.
(Editor's Note: This article originally appeared on Investopedia.com.)
— By Chad Rixse, co-founder and chief compliance officer of Millennial Wealth