Singapore markets closed

Battle For Supremacy: Robo-Advisors Versus Financial Advisors

Lou Carlozo

An epic collision of two heavyweights.

In this corner ... weighing in at 10 billion terrible terabytes of big data, hailing from cyberspace, the investment innovator and challenger, the online robo-advisor!

And the opponent ... weighing in with billions of dollars in assets under management, hailing from every city and suburb in America, the reigning investment champion of the world, the flesh-and-blood financial advisor!

Considering that they're not even as old as the first iPhone, online investment services such as Betterment and iQuantifi have made their mark on a number of fronts. The watershed moment came with the Great Recession, as shaken investor confidence allowed robo-advisors to carve a niche as online tools that enlist software and algorithms for portfolio management.

So do robo-advisors represent a threat to replace the friendly neighborhood financial advisor? Or is it truly a no-contest slugfest, with such vehicles a mere stepping stone to more mature investment partnership?

Here we survey the pros and cons of each approach, and let these two titans slug it out while we keep score and declare a winner -- whether by TKO or otherwise.

Advice for tech-savvy millennials.

A recent survey by the Nationwide Retirement Institute found that 58 percent of millennials conduct their own financial research and make their own investment decisions -- and robo-advisors allow them to do just that. Advantage: Robo-advisors.

Humans can pivot and plan.

"Robo-advisors focused solely on algorithmic asset management tend to leave the human element out of their solutions, and they lack appeal for many investors," says Garrett Silver, head of investing products at Capital One Investing. "Our research shows speaking to consumers on their terms, in their language -- and offering a level of support and guidance to help solve their challenges -- proves most effective and successful." Advantage: Human advisors.

The sales component.

"Too many individuals I have met over the years are market adverse due to a bad experience with stock, mutual funds or other products that they were sold and went really wrong," says Keith Baker, professor of mortgage banking at North Lake College in Irving, Texas. "There is too much financial illiteracy in the United States, and anything that can reduce that is good." Advantage: Robo-advisors.

Questions about algorithms.

Dave Edwards, president of Heron Financial in New York, says his firm employs online sites such as Betterment, but he sees some weaknesses in robo-advisors as a whole: "We think the robos overweight international stocks because there's really only 10 years worth of data on [exchange-traded funds]," he says. "We wonder if the talented and credentialed engineers who designed the allocation algorithms are simply assuming that future performance will match past performance -- an assumption that mere wealth advisors know is a rookie mistake." Advantage: Human advisors.

Automation provides convenience.

"Robo-advisors and other digital investing tools offer a variety of benefits to the everyday investor, including real-time access to the markets any time or place," Silver says. "Robo advice automates the manual aspects of portfolio management, which can reduce asset management costs and overhead." Advantage: Robo-advisors.

Robo-advisors can be simplistic.

Even if a robo asks you your risk tolerance or investment horizon, that won't be enough. "It results in static portfolios even though many people's investment needs are far more nuanced," says Jasen Yang, CEO of Polly Portfolio. "However, I think this will change." His firm plans to roll out a robo that allows for active asset allocation. Advantage: Human advisors.

The human touch is costly.

With advisors, clients will often pay higher fees, but there's more to the picture than meets the dollar. "Advisors are more expensive," says Raef Lee, managing director and head of new services and strategic partnerships at SEI Advisor Network. "You may not need some of their services, but you're paying for them anyway." Advantage: Robo-advisors.

Personal relationships.

Talking to a robot is like, yes, talking to a robot. That same Nationwide survey shows that millennials clearly want something more -- as in someone more. Fifty-six percent of millennial investors think they would be more financially successful with professional financial advice. "With robo-advisors, individuals can deal with a website, avoid human contact and set up an automatic investment strategy," says Lee Frush, a certified financial planner with Atlanta-based Cornerstone Financial. "This works for some people. But these same characteristics are disadvantages for the rest of the investing population." Advantage: Human advisors.

Humans are only human.

With the human element comes temptations that don't throw off automated advisories. "Humans are far more prone to the all-too-human flaws of greed, conflict of interest and careless errors," says Leslie Bocskor, founder and managing partner of Electrum Partners. "Investors utilizing robo-advisors can benefit from the mitigation of human error these services provide." Advantage: Robo-advisors.

Staying calm.

"Human advisors care about ensuring investors don't panic -- ensuring they don't buy high and sell low -- which is one of the banes of individual investor investing," says Steven Wallman, a former SEC commissioner and the founder and CEO of Folio Investing. Advantage: Human advisors.

After-hours work.

"Robo-advisors may not only be more cost-efficient than financial advisors, they also don't get sick or take breaks, and you don't have to make an appointment to see them," says Jeff Kelley, senior vice president and chief operating officer of Equity Institutional in Westlake, Ohio. "They don't sleep either, so if you want investment advice at 2 a.m., you won't need to wake up your advisor; you can just go online. And they can multi-task, serving more than one client at a time." Advantage: Robo-advisors.

Mentorship and guiding.

Ever try learning give-and-take with an android? "The greatest advantage of a financial advisor is the guidance and mentorship that he or she can provide," say Lex Sokolin, COO of Vanare/NestEgg, a wealth management platform that offers robo capability. "The wisdom to deal with financial life events and benefit from volatile market environments is invaluable." Advantage: Human advisors.

And the winner is ...

"As with most things in life, it depends," says Michael McAdam, CEO of McAdam LLC, an independent financial advisory firm. "If you believe that there is one right answer, and that either answer will get you pretty close to the right result, selecting the cheaper one will make sense. If the client has lots of time and has a relatively small amount of investable assets, it'll be hard to find a better option than a robo-advisor. And for anyone who needs a more tailored and customized advice, finding a good team of advisors will make a substantial difference."

"It's not yet known," Edwards says. "Our opinion is that the robo option is a solution in search of a problem. We have that option available to our clients, but our firm's success is not tied to that option in the slightest."

Some think the choice is automatic: for advisors, that is. "Computer algorithms simply can't factor in such complexity and, at this point at least, are not made to do so," says Rob Blume, managing director and senior vice president of wealth management and advisory services for Washington Trust Bank in Spokane, Washington. "A financial advisor provides insights that can't be replaced by automated investing."

Yet instead of slugging it out, many experts believe robos and financial advisors can make peace and, yes, work together. "We believe that is the future of the industry, a platform that does it all," Wallman says. "It's one that supports both robo-advisors as well as specialized, human-directed advice, and offers clients what they need when they need it."



More From US News & World Report