"Until algorithms can be developed to dynamically sequence and replicate human behaviour and decision-making in response to life events, true ‘robo-advice’ cannot exist.."
Hearing the various interpretations of so-called ‘robo-advice’ models, you may be thinking the ‘bots are preparing to take over the world. However, leading US providers are now introducing humans into their robo-advice models, or launching “hybrid” automated models.
Let me be clear: I am not a fan of the expression ‘robo-advice’. It implies that we are somehow able to replace human beings with a fully functioning, (artificially) intelligent machine or algorithmic alternative. As if to prove my point, some of the biggest ‘robo-advisers’ in the US have capitulated and are adding humans to their advice services.
Betterment, the third biggest US ‘robo’, has this year introduced humans into its advice chain for investors with balances over US$100,000. Those investors will receive regular phone calls and account monitoring services from certified financial planners.
Last month, the second largest ‘robo’ in the US, Schwab, also combined its automated investment management technology with human advisers for its clients with at least $25,000 to invest.
The US’s biggest ‘robo-adviser’, Vanguard Personal Advisor Services, already blends human advice with its so-called robo platforms, as well as the fifth biggest US ‘robo’, Personal Capital. These moves by the biggest ‘robos’ in the world are a sure admission that we are a long way off from a fully automated model becoming a reality.
The fact is, humans are needed to round out the financial advice process, and increasingly ‘robo-advisers’ are becoming ‘hybrids’ by introducing people to round out their financial planning service.
As it is now, ‘robos’ can’t replicate the quantum mechanics and dynamics of how the human brain works. A human brain is constantly evolving. A human can know one thing today then learn a new perspective tomorrow. Outcomes can vary as one gains knowledge. In contrast, ‘robo-advice’ is limited by computer programs that follow predetermined rules and deliver pre-defined outcomes. A ‘robo-adviser’ reduces investing to a formula.
Of course, life isn’t lived in a vacuum. Our lives are fluid and constantly changing. Things happen. People get divorced, we retire from work and we get sick. Some of us lose our jobs. Some of us lucky ones receive a surprise financial windfall. For all of us, markets go up and then fall, and inevitably, our plans become unstuck.
Until algorithms can be developed to dynamically sequence and replicate human behaviour and decision-making in response to life events, true ‘robo-advice’ cannot exist. Replicating the brain’s thinking or feelings is a very complex problem to solve. It is not like the replication of a motor skill or sensory function.
So, the automation of financial planning advice can’t yet deliver a complete and holistic advice process. Advice is holistic in nature. And even the ‘robos’ are realising that.
But don’t get me wrong. Computers and automation do have their place in the financial advice process.
Computers are now used to conduct financial modelling and simulations using statistical methodologies such as stochastic optimisation and Monte-Carlo algorithms. Stochastic modelling uses data to view multiple outcomes and variables to predict outcomes. Monte Carlo analysis simulates the impact of risk and uncertainty. This automation has become essential to allow financial advisers to model complex scenarios such as a person’s cash flow, debt, asset allocation, economic variables, and others such as tolerance and capacity for risk. A human brain simply cannot conduct these calculations.
In addition, goals-based advice algorithms can auto determine the probability of a consumer reaching their goals, the impact of other goals, scenario projections of wealth, factoring in variables such as economic attributes, cashflow, products, asset allocations and risk. This creates a more solid baseline for financial advice. The consumer can then assess 'trade off' and 'what if' conversations with their financial planner.
But client’s goals need to be kept in focus. Financial planning strategies need to trace back to a client’s specific goals to deliver the outcomes that the client desires. This process involves much more than an algorithm recommending investment asset allocations and products (the current definition of ‘robo’), which may have little or no relationship with one’s actual goals or wealth journey.
And here, a human is core to such discussions.
Betterment’s founder and CEO Jon Stein hinted at this when he said in January: “As we’ve grown and encountered more and more customers, we started to hear anecdotally: ‘I checked out your site. I love what you do...but I really wanted someone to talk to.”
And that’s why the biggest US ‘robo-advisers’ are turning to humans to get the job done. Conversations about trade-offs, eliciting and analysing one’s goals cannot be done with a computer alone.
Humans offer expertise throughout a client’s life cycle. Human knowledge is influenced by emotion. Humans must consider feelings (empathy), as well as use computers, to crunch the numbers. It’s understanding the feeling that the ‘robos’ don’t yet get.
Until then, we can expect more ‘robo’ models to add humans to their mix.