Do investors need people anymore?

The past few years have seen the rise of robo advisers, a category that includes not only fully automated investment services and advice but also “hybrids” that pair computerized services with hand-holding from human advisers. The firms generally offer passive investments, as opposed to the active management that a human adviser can provide, but they charge much slimmer fees.

Robo advisers have been making aggressive moves lately, slashing the minimum balance required for an account; some have eliminated minimums entirely. Meanwhile, some big investment firms have begun offering hybrid services or are experimenting with fully automated offerings.

Some boosters argue that many investors don’t need human help at all—robo advisers can handle their portfolio needs and deliver better performance than advisers who may be unscrupulous or simply unable to beat the market.

Critics, though, say that digitized advisers may work as a complement to humans, but can never replace the expertise of a flesh-and-blood counselor.

Lisa Kramer, professor of finance at the University of Toronto and a member of the board of advisers for Justwealth, a newly launching robo-advisory firm in Canada, makes the case for robo advisers, saying they have advantages that can deliver greater wealth. Scott Smith, director of advice relationships at Cerulli Associates, says robo services don’t provide the qualities that people want in an adviser.

Yes: Humans often make costly errors

Most financial advisers are human. And that’s a huge problem.

Humans come hard-wired with cognitive biases that often lead them to make suboptimal financial decisions. Research shows that people see patterns in data where none exist, they believe they are more knowledgeable or skillful than they actually are, and they overlook potentially important information, even when it’s as obvious as a gorilla on a basketball court, as a famous experiment proved.

And, unfortunately, financial professionals are just as human as their clients, leaving them just as vulnerable to cognitive biases. Research has found that mutual-fund managers—professionals who are arguably very motivated to overcome their adverse inclinations—make costly investment mistakes, just like other people.

The result of those mistakes is significant underperformance. One of the big appeals of human advisers is active management—the idea that these are investment pros who make moves that deliver bigger returns than simply tracking an index, for instance.

Yet the evidence consistently shows that actively managed funds tend to underperform passively managed ones. So why choose an active but unpredictable human adviser rather than a robo adviser, which will typically take a passive approach that delivers more consistent returns?

Bad incentives

Even if investors feel confident that their human adviser can overcome cognitive biases, there’s another problem to consider: Human advisers have financial incentives that don’t always work to the benefit of their clients.

A recent audit study found that the most accessible sorts of advisers (including advisers who work at banks or retail brokerage firms) often steer their clients toward products that are in their own best financial interest, not that of their clients.

An investor with deep pockets might sidestep this particular problem by seeking an independent adviser who charges an hourly consultation rate rather than relying on commissions or performance fees. But many individuals may not be able to afford this option. Indeed, human advisers’ fees can be high even if the adviser is paid a percentage of assets under management.

A steep difference

Consider an investor socking away a couple of thousand dollars every year over a lifetime. A human adviser might charge that investor an annual fee of 1% to 2% of assets versus a robo-adviser fee of 0.25% to 0.50%—a difference that can amount to tens of thousands of dollars in lost wealth. Robo advising offers a viable, low-cost investment solution that is within reach even of new investors starting out with small nest eggs.

Of course, the robo adviser name is a bit of a misnomer; some of these services offer their clients the opportunity to interact with a human if they feel they need extra hand holding. That fuels the argument that robo advisers can’t provide the in-depth, hands-on services that humans can.

Yet, in many cases, digital advisers are fully capable of helping investors understand their needs and goals and providing cogent analysis. In fact, in some cases, a robo adviser is even better equipped to provide service to clients than a human adviser. Consider a case where the market crashes. A human adviser would be hard pressed to contact every client quickly to provide reassurances. But a robo adviser could send all of its clients electronic messages at once to remind them that their portfolio was selected with their characteristics in mind, and it remains appropriate even in the face of market fluctuations.

It’s also important to note that while investors may feel comforted by the idea of the “human touch,” the conflicts of interest and underperformance at traditional advisers make it clear that the human touch may foster a false sense of security.

Of course, robo advising won’t fit every situation. Investors with complex estate, business or tax circumstances may benefit from the more customized guidance of a traditional financial adviser. But for the majority of investors, robo advising offers advantages that can translate into a plumper bottom line than the typical human adviser can deliver.

No: Investors need—and want—the human touch

Robo advisers do a great job of maintaining client portfolios. But that’s only one part of the job of financial management—and that’s why human advisers aren’t going away anytime soon.

Traditional human advisers deliver the kind of personal, hands-on service that investors consistently say that they want. My firm’s research, in partnership with Phoenix Marketing International, has found that investors have consistently cited an adviser’s willingness to “take the time to understand my needs and goals,” “look at my entire financial picture” and “explain analysis clearly” as the most important qualities they are looking for in an advice provider. These factors are simply not elements of most digital platforms.

Complex choices

Only one-third of those surveyed say they would be comfortable using an entirely digitized service as their primary investment adviser. For the bulk of investors, turning over one’s life savings to an adviser of any kind requires a level of trust that a purely electronic interface cannot replace.

Investors’ preference for human advice is further evidenced by the decline of self-directed investors — those who want to handle their own portfolios and aren’t looking for advice. Since 2010, the population of self-directed investors has declined to 38% from 45%, even as the tools for monitoring and managing portfolios have steadily improved. Why is this happening? I believe that investors are using these tools to get a basic understanding of their situation and then turning to providers of professional advice once the complexity exceeds their comfort level.

Simple risk-tolerance questionnaires, which serve as the core of robo advisers’ client-discovery process, do not get to the heart of understanding the entirety of an investor’s financial needs and goals and how their investment portfolio works in the context of their complete financial situations.

By working with an adviser, clients are able to create customized plans that address everything from the evolving insurance needs of a growing family to balancing multiple savings goals and, finally, to creating an effective estate plan.

Continuing coaching

Just as important, advisers are able to offer the continuing coaching to address the challenges clients face along the way—from market volatility to cash-flow needs—to ensure that transitory issues don’t devastate their long-term strategy.

Some critics point to supposed advantages of robo advisers. For one, they say that a passive, robo-managed portfolio will outperform a portfolio actively managed by a human. But that’s a matter of investment strategy, not an argument for going exclusively with digital advisers. Many human advisers might recommend passive investment strategies, depending on the needs of the client.

The critics also say that human advisers are prone to unscrupulous moves, like pushing investments that are suboptimal for the client but profitable for the adviser. There are bad actors in any profession, of course, but the vast majority of advisers are doing their best to serve their clients.

Additionally, it’s important to note that the use of robo advisers does not eliminate this type of conflict. The people who set up these services might design their portfolios or algorithms in ways that systematically maximize their own revenue, potentially at the expense of their clients’ best interests.

The need for human help

Ultimately, it’s all about what investors want—and what they seem to want more than anything is the human touch. Many of the most successful digital platforms already include access to human advisers, while others are being retrofitted to serve as portals for traditional advisory practices.

That doesn’t mean, of course, that there’s no market for digital services. Some traditional human-centered advisory firms, for instance, are adding digital tools to their offerings. But they’re doing so as a complement to the kind of personalized service that only they can provide to clients, not as a replacement for it. Creating and coaching households through the realization of an optimal comprehensive financial plan still relies on the responsiveness and rapport only a traditional adviser can provide.