Figure 1: Investment Lifecycle Model depicting the role of robo-advisors Vs human advisors
- Customers might be mostly single, at the initial stages of their professional careers and would have around < 150K dollars to invest.
- He/she would prefer simple investment guidance and portfolio management, which they can self-manage at lower costs.
Robo-advisors vs human advisors - Robo-advisors, which charge <= 0.50% of Asset Under Management (AUM), are very well equipped to exactly address this. However, some of the human advisors who want to gain a foothold in the advisory market and can compete on lower costs might as well operate in this phase either independently or in conjunction with robo-advisors.
- Customers start building wealth actively as they move to prime positions in their careers or self-employment.
- They also acquire a family and look to own housing property and other assets after meeting their household expenditure.
Robo-advisors vs human advisors - At this phase, there will obviously be some need for end-to-end financial advice from a personal advisor. Still, significant proportion of customers might prefer robo-advisors due to the simplicity they provide in managing investments at lower costs as well as the investor inertia associated with approaching human advisors.
- Though similar to accumulation in terms of wealth creation, many customers during this phase would start planning for retirement as their AUM rises significantly in value.
- As they age, customers would start prioritizing safety of capital over returns and accordingly their preference will be more towards specialized human advice (rather than robo-advisors) despite the additional cost.
Robo-advisors vs human advisors - Later part of this phase would also need pre-crystallization advice (which human financial advisors are best at) as customers start timing their payouts.
- Represents the phase where most of the customers, having reached their wealth pinnacle, would need specialized advice for wealth conservation and payouts.
- Crystallization can assume various forms - Drawdown payments from pension funds while still keeping the capital invested, Annuitization to commence periodic payments, Lump sum cashouts as commuted payments etc. that can be in whole or tranches, depending on specific customer needs.
Robo-advisors vs human advisors - For these specialized advice needs, customers at advanced ages are most likely to opt for human advisors.
Inferences from the analysis: Should human advisors worry?
- During the initial couple of investment lifecycle phases, since their financial management needs are less complex, customers might prefer to self-manage their investments with less costly robo-advisors. This does not, however, preclude the role of human advisors during these phases, who can still offer their specialized advice at costs on par with robo-advisors through virtual means and in fact, be able to create better customer pull through their foresight and communication.
- Likewise, we also see real-world instances of advisor firms having co-existing teams of human and robo-advisors that offer services to their clients across all the investment phases.
- However, as their net worth increases with age and their financial management needs become more complex due to multiple life events, customers prefer human advisors even at the cost of additional advice fees.
Despite the foregoing facts, we cannot dismiss the fears of the advisor community as baseless. Better data gathering, analytics learning and visualization of advice patterns will enable more sophisticated robo-advisors in the coming years. They can infringe upon the perceived area of strength for human advisors - comprehensive financial planning and inclusive portfolio management, which will be available to customers at lower costs and convenience of use.
However, as long as the specialist human advisors stick on to their basic tenets – providing quality financial advice that puts the client interests above all, a well carved out investment strategy and execution, and more importantly, personal support during times of financial crisis, they will continue to excel over robo-advisors.
Human advisors: Helping customers navigate COVID-19 disruption
The COVID-19 crisis has thrown up few use-cases that demonstrate opportunities for human advisors to establish themselves as trusted partners to their clients:
- Customers, specifically in lifecycle phases 1 & 2 and heavily invested in equities, would have seen their overall investment balances drop rapidly. Specialist human advisors should engage in virtual meetings with their distraught customers during these times to allay their fears and convince them to stay invested in equities for more time to reap the benefits of stock market upturn in future.
- Even though some government regulations (US & Australia) permit for partial withdrawal of superannuation funds to meet COVID-19 induced income losses, human advisors should advise clients to go for such withdrawals only as the last resort, since drawing out these funds at younger ages might work against their retirement build-up.
- Clients at advanced ages and in the crystallization phase would have planned for drawing down income from some/all of their accumulated investments. In the current low interest rate environment, they will need personalized advice to postpone their drawdown/annuitization plans until rates improve, which personal advisors can very well handle.
Investing on trust in the new normal
In their arduous journey towards overcoming the challenges posed by COVID-19, the customers will expect quality financial advice from specialized human advisors backed up by intelligent robo-advisors. Keeping this in mind, the financial services industry has the prime responsibility to dispel the advisor community’s fears, thereby providing them the needed confidence to continue as trusted investment partners to their clients. Besides, this will also serve as a catalyst for more professionals to join the advisor community that can help address the anticipated shortfall of financial advisors globally in the coming years, even as we gear up to meet the challenges in the new normal.