Please enable JavaScript to view the comments powered by Disqus.

Expert Insights for Smart Financial Planning

When It Comes to Investment Advice, Humans Beat Computers

Robo advisers offer some advantages, but the most comprehensive financial guidance still requires human touch.


A new online investment service promises to provide all consumers with low-cost expert investment portfolio management. Known as robo advisers, digital advisers and online advisers, these groups offer fully automated, low-cost, low-touch, algorithm-driven professional portfolio management.

See Also: Is a Robo Adviser Right for You?

For years, the financial services industry made all of the rules when it came to investing. If consumers wanted to assess their financial situations, determine appropriate investments, or buy and sell securities, they had to work with a financial professional. In the late 1990s, advancing technology opened the financial floodgates, and everything changed. For the first time, without the involvement of a financial adviser, consumers could easily access company information, the industry's best investment research and trade securities economically. For some consumers, it was the answer they were looking for. Suddenly they had all of the necessary information at their fingertips; they could save money and choose not to share their intimate financial information with anyone.

When it comes to investing, individuals who do it themselves are a unique breed. Some are very knowledgeable; some are confident enough to make their own investment decisions; some are thrifty; and some are too arrogant to ask for help. But the do-it-yourself approach doesn't work for everyone, and the majority of consumers feel more secure when working with a knowledgeable industry professional.

Do robo advisers offer the best of both worlds?

According to the firms offering these automated services, in today's world expert investment guidance and competitive investment performance are commodities. They do not require human intervention, can be delegated to a computer and cost much less than a financial adviser. The process is simple: A consumer begins by filling out an online questionnaire that asks questions about their goals, financial situation and experience. Once that's finished, the firm's computer does the work of matching the individual's investment resources, goals and risk tolerance to one of its model portfolios. If the consumer likes what she or he sees, the money is transferred, the investments are made on behalf of the individual, and the portfolio is managed. At last, these investment management firms suggest, consumers have a way to get expert portfolio management without having to choose between doing it themselves or hiring a financial adviser. Who could ask for anything more?


As it turns out, most of us.

Why financial advisers are critical

There's no question that low-touch portfolio management will work for some, but for the vast majority of consumers, hiring a financial adviser still makes sense because:

1. Financial advisers do much more than manage investment portfolios.

Unlike the "investment brokers" of the past who only bought and sold stocks and bonds, today's financial advisers provide a broad array of services, including goal setting, financial planning, insurance planning, investment planning, estate planning and legacy planning. Online money managers focus solely on managing investment portfolios, which makes their work somewhat one-dimensional.

2. Investing is grounded in science, but at its best, investing is an art.

Gathering economic, market and investment-related information and data; determining an investor's resources; gauging risk tolerance and computing cash flow needs are variables that influence investment decisions, but they do not represent the entire investment process. The best investment plans integrate the scientific, data-driven strategy with the artistic flair that the financial adviser has developed from his or her years of experience, knowledge of what it takes to achieve goals and understanding of human beings, their motivation and emotions.


3. By definition, advice requires opinion and counsel.

Advice is defined as "an opinion about what could or should be done about a situation or problem; counsel."

While market and investment opinions are readily available from a variety of sources—such as the media, the Internet, well-meaning relatives and all-knowing friends at a cocktail party—counsel is formal guidance that is delivered by a human being, not a computer. Computers are wonderful, but no computer on Earth can do what financial advisers do best: protect their clients from themselves and their emotions by calming them when life transitions throw them off-course and managing their anxiety during market downturns.

Many think of investing as a purely intellectual exercise. Intellectually, the case for investing in financial assets makes perfect sense. Our intellect, the rational mind, understands that over the long-term, investors have been rewarded for investing in stocks and bonds, staying the course and remaining invested for 10, 20 or 30 years.

Unfortunately, when markets are volatile and news is gloomy, that intellectual exercise becomes an intestinal challenge. When money is at stake, human beings become emotional and anxious. Emotions and anxiety trigger our most primitive instinct of "fight or flight," and when that happens, we make decisions that are not in our best interest, such as selling investments into declining markets.


Consumers benefit most when they form a relationship with and receive human counsel from a financial adviser. Despite what the robo advisers say, there is never one answer, never one size that fits all. When the dust settles, it's likely that investors will reap the rewards of technological advances in portfolio management by working with experienced financial advisers who use algorithm-driven portfolio management tools to benefit their clients.

See Also: 7 Best Online Brokers

Jan Blakeley Holman, CFP, CIMA, ChFC, CDFA, CFS, GFS, is Director of Advisor Education at Thornburg Investment Management, a global investment management firm.

Comments are suppressed in compliance with industry guidelines. Our authors value your feedback. To share your thoughts on this column directly with the author, click here.

This article was written by and presents the views of our contributing expert, not the Kiplinger editorial staff.