What is Robo-Advising? From Widipedia: “Legally, the term “financial advisor” applies to any entity giving advice about securities. But most robo-advisors limit themselves to providing portfolio management (i.e. allocating investments among asset classes) without addressing issues such as estate and retirement planning and cash-flow management, which are also the domain of financial planning.”
So, notice that advice is really only about investing in most cases. There is no planning involved. AND … there is a difference between investing and planning. A couple of analogies to illustrate that difference:
- Cables and Bridge analogy: What is the difference between investing and planning? (If you click and read only a couple of these – this, and the next, analogy would be them …) … this describes the differences between seeing just cables (investing), and also seeing the bridge (the plan) (the link describes each).
- Flight analogy: Is Investing a Plan? Investing is the fuel that propels your accounts (the aircraft) towards your goal (destination). The flight plan organizes and monitors progress of all of this as well as emergency procedures, etc.
Presently, there are many issues with Robo-advising besides little to no planning.
- The lack of charging transparency. Just because you can’t see fees or expenses, doesn’t mean they’re not being charged in some manner.
- They appear to be well diversified, but have portfolio construction gaps. There is a difference between allocation and diversification.
- The biggest issue: They come up with varying results – inconsistent – primarily due to input misunderstandings or different undisclosed proprietary approaches to solving for their suggested solutions: “… demonstrate a serious limitation of the “software without human intervention” model. It isn’t enough that the software capabilities improve. Someone still has to understand the model to use the software effectively.”
Will automated software replace financial planning jobs? I don’t think so since planning relies on so much more flexibility in problem solving that software programming has issues codifying into software.
Do robots rob workers of jobs?
See this short TEDx Cambridge video for a great short discussion about the question of Why are there still so many jobs? Why are there NOT fewer jobs today because of so much automation and computerization? As the reliability of each cog in the wheel increases, the importance of the job humans do increases too. In other words, computerization has increased reliability of the functions they do. The importance of what hasn’t been computerized or automated has thus increased for the humans.
This argues that the human factor involved with financial planning becomes even more important in helping people better understand what the programming needs are for input in order to get better output.
The investing component may one day become completely computerized … however, it will be harder to replace the human interaction, communication, and understanding that humans have, that machines don’t have, concerning the planning part in financial planning. How do the unique circumstances and desires of people modify what they should do in order to accomplish what they want specifically – rather than getting what everyone else gets? The answer to that question comes from human interactions focused on planning how do what each person wants to do.
In other words – issues and goals aren’t resolved without human discussion and problem solving. We are far from robots or computers doing this … and the TED presentation above suggests, workers will find something else. Imagine a world where the Luddite’s had been successful in obstructing change.
As I argue in “Just where does the fear of outliving our money come from? Part I & II,” I think better software programming will lead to more consistent retirement income results. Much different from the various answers the many different approaches use, primarily because the profession hasn’t settled on how to design the calculations that should mimic the planning process. But, changing and improving programming doesn’t happen without demands from users and planners alike. Eventually, a process that mimics how humans plan will emerge. How do humans plan? By periodic reviews with updates to what was not known previously (and that includes updates to all the data too).
More and better computerization is a good thing. This will lead to planners focusing on what value they bring to the relationship – behaviors that lead to success as well as consideration of things that people haven’t thought of that may affect the success of their plans.
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