Investment & High Tech

Where Technology and the Human-Element Eclipse

Four areas where the robo-advisor falls short

by Gregory J. McLaughlin, MS, CFP

Mr. McLaughlin, MS, CFP® is a financial planner with Centinel Financial Group, LLC in Needham Heights, Massachusetts. He can be reached at 781.446.5016 or by email at The opinions presented are the authors and may not necessarily reflect the opinions of Signator Investors, Inc. Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Advisor. 160 Gould Street, Needham Heights, MA 02494. 781.446.5000. Centinel Financial Group, LLC is not affiliated with Signator Investors, Inc.

When I was a kid there was a popular cartoon called the Jetsons. As you may recall, the show centered on a family living in space with a housekeeper named Rosie. Rosie was a robot. At the time, the idea of a robot playing a role in real life seemed so farfetched; however, 25 years later those same robots are playing a role in our lives and I believe they are here to stay.

While these robots are dramatically changing the auto and technology industries, we are still in the infancy stages of determining the impact they will play in wealth management and financial planning. Surprisingly the first roboadvisor was created in 2008 during the last crisis and, like in every industry, the concept has evolved into more dynamic options today from top companies such as Betterment and Wealthfront.1

These very companies are leading the charge in attracting investments from consumers across the world. In fact, it will be likely that their market share will continue to grow but this will be in collaboration with comprehensive financial planners.
While robots will continue to play a viable role in the financial world mostly through investment management, there are a few areas where financial planners still have the advantage – and probably always will.

Human Connection

  • First, robo-advisors are missing the important ability to connect with another person, read body language and truly grasp whether a client comprehends or understands the topic at hand. Many times these are the moments when we as financial planners are able to clear up slight misconceptions to provide the confidence and clarity to help our clients make a sound financial decision.
  • Second, financial planners will be able to manage the emotions of a client during the next downturn, whenever that may occur. Although it is easy to make rational decisions when things are calm, it is a whole different ball game when the markets are volatile and the news is telling us the world is falling apart. Providing perspective and being a sounding board for clients during these times is an area where robo-advisors fall short.
  • Third, financial planners are able to provide holistic planning that in order to improve a client’s financial life and connect them with other professionals to make sure the client’s entire plan is complete.
  • Lastly, an important part of a financial planner’s job is to make sure the client stays on track and consistently updates and implements the key points in their plan in order to achieve their long term goals. These essential four advantages, which are here to stay, will most likely widen the gap in the financial planning world when it comes to roboadvisors.

How many times have you sat down with someone and discussed a topic at hand only to determine after the conversation that the other person really did not fully comprehend the idea? Whether we are talking finances, fitness, sports or politics, this seems to happen on a pretty regular basis.

Often times when working with a client, a financial planner has the opportunity to learn about past experiences, how emotions drive the client’s behavior and which type of learning style they prefer. It can also become more complicated when working with a couple whose answers may differ.

This is where the value of the human connection becomes a differentiator for the client, their experience, and ultimately their probability of success. A robot cannot confirm whether a client is comprehending information by the look in their eye or their body language when discussing a certain topic. This is where financial planners provide tremendous value to make sure clients are learning, feeling comfortable and truly understanding the benefit of certain strategies that are being recommended.

Identifying Risk Profiles

This topic is especially important when discussing a risk profile. We know clients are generally more aggressive when markets are good and less aggressive when markets are volatile. Often a client will complete a risk profile questionnaire and not fully understand what the answers to the questions truly mean.

After reviewing the results, a client could fall into the aggressive investor category which could result in allocating 80% of his or her funds into equities. The key follow up is to ensure that the client is completely aware of the true meaning of how much volatility they can expect to see when times get tough.

Often times when discussing percentages and volatility, it takes the next step of translating those percentages into actual dollar amounts in order for the client to truly comprehend the magnitude. When I tell a client that at a certain risk level they could potentially lose 30% in a downturn it does not really hit home until translated into dollars. When I then phrase it as: If you have $1,000,000 and the market drops by 30%, you will be at risk of losing $300,000. Then, the important follow up question is: how would you feel about that?

This leads to a conversation about expectations and at times may result in the decision to make small shifts in the portfolio or break funds into a few different buckets to ensure that the client is comfortable with the potential risks and will stick with the plan. Often times, the creation of a simple visual that breaks investments into buckets (conservative, income and growth) can provide the perspective clients need in order to balance emotions and the confidence to know their plan has been well thought out.

This ability to stick with a plan is especially important during volatile times in the market. Despite the idea of robo-advisors sending emails to clients instructing them to stay calm and explaining that volatility is normal and it is important to stick with the long term plan, it is not always easy for the client to follow these suggestions.

This prudent process of taking the time to fully understand the client’s thoughts and emotions and encouraging them to stay the course during volatility will reemphasize the value that a financial planner provides

These are the times where a live conversation is vital, whether it be a face to face meeting or a phone call, to connect and walk a client through their original plan and explain why it is important to stay the course. These are the moments where true value is brought to our clients. According to Dalbar, Inc., the S&P 500 Index earned 9.85 over the 20 year period ending on 12/31/2015, while the average investor only earned 5.19.2

During times of volatility, many investors get in too late and get out too late. Instead of sticking with buying low and selling high, we often see many people doing the opposite. Without a well thought out plan, awareness of your personal tendencies and an advocate who has your ultimate goals and objectives in mind, it is easy to make irrational financial decisions that can severely hinder your long term plans.

Drafting an ‘emergency letter’

One strategy that a financial planner can implement with a client is to have them write an emergency letter and put it away in a secure place and provide it to the client when times are rocky. This letter will usually state facts like: my plan is thorough and I know the market will be volatile and when it is I should remember that the market always comes in cycles and I probably do not need to take action unless my timeline or goals have changed.

This prudent process of taking the time to fully understand the client’s thoughts and emotions and encouraging them to stay the course during volatility will reemphasize the value that a financial planner provides.

When meeting with a client it is certainly important to focus on managing their financial plan, but I truly feel a job well done is making sure I have done my best to improve all facets of their life. Although it is possible to look at a client’s financial life through a vacuum and know you helped complete all the key requisites that fall under the financial umbrella, this would not provide the holistic experience and improvement that many of us crave.

Often times in a meeting we will identify needs to update or improve legal planning, insurance planning or tax planning. Here is where financial planners can elevate the client experience by connecting individuals with other professionals who can round out their professional team. This can benefit the client since they will receive a more balanced approach and the team of professionals can provide clarity over ideas and serve as a sounding board for different strategies the client is considering.

This collective planning process is only accomplished through working with a financial planner who makes the effort to uncover all potential problems or concerns. The personal connection with the client and the awareness of their personality type and the learning styles they prefer allows the financial planner to find the most capable and compatible professionals to help complete the other pieces of the plan.

The last piece of the puzzle is seen as the most important and involves making sure the client implements the plans and strategies that have been presented to them. Often times making an introduction to an attorney or accountant will not translate into a meeting unless the client is managed throughout the process.

To help make progress, often times I offer to coordinate the meetings for the client. I also ask clients how they want me to keep them accountable when it comes to the implementation of their plan. We will put together a list of items to implement in order of importance and set a range of timelines that seem reasonable to complete each task.

The average client may have 5 to 10 action items that encompass all areas of their financial plan. Depending on the details of the plan, the timeline to implement all the items usually falls within a 6 to 12 month timeframe. Once the plan is completed it is important to transition to a review process to ensure that expectations are clear and communicated in a manner that connects with the client. How often are we going to connect? Will we meet face to face, Skype or over the phone? What are the key elements we are going to review each time? What is the course of action or protocol to address changes or volatile times in the market?

Devising a detailed game-plan

The more detailed this game plan is, the better the long term success will be for the client and our relationship. Completing a plan and knowing what you need to do to achieve success is equivalent to signing up for a gym and knowing where it is located. Thus, to truly impact the lives of clients, financial planners must help them develop the habits which will drive the success in good times and bad and give them the greatest opportunity to achieve long term success.

Roboadvisors and artificial intelligence at a higher level are creating great opportunities and efficiencies that are certainly here to stay. The good news is they will be a complement to many savvy financial planners who focus on the right services and experiences that clients cannot receive from a robot.

First and foremost, being a human, engaging another person, listening and building a connection is more important today than ever before. We can all relate to the experience of calling a customer service line and being so relieved to talk with a live person who actually understands your needs and can help solve your problem.

Secondly, financial planners are there when clients need them the most, during volatile times in life and the markets. Additionally, planners are able to provide the holistic experience to help clients wrap all facets of their lives under one umbrella and act as the quarterback to keep the momentum going in the right direction.

Lastly, at times it is important to provide accountability to ensure clients meet their goals and take advantage of all the opportunities they deserve in life. In summary, the role of Financial Planners is best summarized by Teddy Roosevelt, “Nobody cares how much you know, until they know how much you care.” ◊