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  • Home>Practice Management>Technology>Automated Advice Gets Personal

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    Automated Advice Gets Personal

    No longer will robos be relegated to solving only the simplest problems.

    Mike Barad, 06/08/2017

    Futurist Arthur C. Clarke said, “New ideas pass through three periods: 1) It can’t be done. 2) It probably can be done, but it’s not worth doing. 3) I knew it was a good idea all along!” Automated investment advice, or robo-advice, may be passing through Clarke’s stages of acceptance. The question isn’t really whether robo-advice can be done; it’s whether it can be as good as a human advisor. Your answer to that question is, “It can’t,” right? Silly human.

    Asking a machine to do something as well as a human, in this context, doesn’t mean expecting it to perform the actions in the same way with the same result. I think you’ll agree that machines do some things better than humans (such as complex calculations) and that humans do some things better than machines (such as showing empathy).

    Investing in the traditional sense—putting money to work using a financial scheme to earn a profit—can certainly be done better by machines. After all, the majority of stock trading in U.S. markets is now done by algorithmic high-frequency trading. Virtu Financial VIRT makes millions of electronic trades each day and lost money on only one trading day in five years.So, we know that machines can be programmed with investment strategies and can execute on those strategies with emotionless precision. But financial advisors do so much more than investment execution for their clients. One of the greatest values an advisor offers is that of a personal guide, balancing out a client’s behavioral biases to stay on the path to achieving financial goals. My aim here is not to show how roboadvisors are better or worse than human advisors, but rather to provide a vision for how automated advice will become far more tailored and valuable to investors.

    Let’s explore some of the elements of successful investing toward achieving financial well-being.

    The Big Picture
    Financial advice is best formed in proper context. By using account-aggregation services, advice will be informed on “held-away” assets and liabilities for the entire household.

    Too often, human or machine has limited information to act upon. The problem is trust and control. A human advisor only has perfect knowledge over the assets he or she is managing for a client, a limited view into any assets collected as part of forming a financial plan, and no knowledge of large pools of assets and liabilities that the client simply doesn’t care to disclose.

    The average investor probably has a retirement account at his or her place of employment, a house, and a host of loans/credit debt to pay off that an advisor might know little about. The totality of these assets and liabilities that are “held away” from what advisors manage is large. ByAllAccounts co-founder James Carney says that “over half of a typical advisor’s clients have held-away assets, which could represent between 20% and 40% of an investor’s total portfolio.” I know in my own case, it is even higher. Advisors are crippled by limited information disclosed by clients.

    Today’s robo-advisors often have very little knowledge of users’ broader financial situations. Often, investors’ first encounter with a robo is testing out the service with just a small investment. While human advisors may not have a complete picture of their clients’ finances, they certainly know clients better than a robo does, especially if they’ve completed and continue to refine a financial plan.

    Mike Barad is the head of product components & services for Morningstar.