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About nine years ago, robo-advisors became a significant trend in the financial world. The financial media was inundated with ads promoting robo-advisors that offered portfolio management advice with minimal human interaction. They were attractive because they offered low fees, low investment minimums, and the promise of “the same investment advice provided to multi-million-dollar clients.”
There were predictions that the financial industry would be turned upside down and that professional financial advisory firms would suffer as everything could be automated. Robo-advisors use an investment formula based on modern portfolio theory, which aims to maximize expected return for a given level of risk. Model portfolios are created using this formula and tailored to accommodate various risk perspectives. These portfolios can then be further customized to focus on specific goals, such as dividends, tax efficiency, or sector concentration.
Nearly a decade later, the financial advisory industry is still thriving. Now, however, the focus has shifted to artificial intelligence. Will we see a resurgence of robo-advisors, and will AI take over the financial planning industry?
In my experience, investors value having a human advisor to ask questions and guide them through processes rather than relying on a chatbot that provides generic, high-level answers. For example, anyone can ask a chatbot to create a monthly household budget and receive a five-step process for calculating it. The chatbot might offer a textbook answer that includes line items for an emergency fund, retirement contributions, investments, and college savings. However, it won’t tell you how much you should have in your emergency fund or how much you should be saving for retirement. It also won’t explain the specific implications of choosing a Roth IRA versus a traditional IRA for your situation or how that decision could affect your taxes. When working with a financial professional, investors typically don’t leave with unanswered questions.
Some investors appreciate the simplicity of a robo-advisor. They can invest $5,000 and let the robo-advisor manage it, expecting the money to grow over time. However, there inevitably comes a time when questions arise, and that’s when most people seek personal interaction.
Consider the frustration of calling Comcast with a question, only to be greeted by an interactive troubleshooting wizard asking you 10 questions that never quite address your concern. It’s frustrating to wade through generalizations to get an answer to a simple question. The dynamic between a computer and a person is vastly different from the relationship built over the years with a financial planner who has taken the time to understand you, your values, and your goals.
AI has made great strides in recent years and is becoming more sophisticated by the minute. While robo-investing can trade daily and be tax-efficient, it is not personalized financial planning. A trusted financial advisor provides guidance that goes beyond investment selection. When you work with a financial professional, you benefit from someone who monitors the overall picture of your financial life, ensuring that all aspects — such as estate planning, insurance, cash flow, and tax circumstances — work together seamlessly.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial and a co-host on “Money Talks” — your trusted resource for your money, your future, your life — airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
