While apprehension about automation is pervasive throughout the industry, a recent Vanguard study of investors should put financial advisors at ease.
In “Quantifying the investor’s view on the value of human and robo-advice,” Vanguard behavioral economists Paulo Costa, Ph.D., and Jane Henshaw find that there is “intense loyalty” to the human connection a traditional advisor provides.
In fact, 93% of investors with human advisors want to maintain their relationship with a financial advisor, according to the firm’s survey of more than 1,500 U.S. investors to understand whether technology and digital advisors are a threat to human financial advisors. Conversely, among those solely using digital advice, 88% said they would be willing or very willing to bring on a human financial advisor when asked about their future preference for advice delivery.
“So, despite some alarming headlines in the financial press, only a tiny fraction of investors with a human advisor would discard their traditional advisor relationship,” Costa comments in a separate post, adding that regardless of the capabilities offered by advances in digital advice, the “emotional core provided by a human advisor remains for many investors an unfillable void.”
At the same time, the researchers believe the findings have strong business development implications for human advisors, such that robo-advised clients could represent an untapped and under-targeted market for human advisors, especially as those investors’ needs become more complex.
The Vanguard researchers’ findings include the following.
Advice adds value across the board: Regardless of delivery method, investors believe that advice provides substantially higher incremental portfolio value versus “going it alone.” The perceived value-add to annual performance was 5% for human advice and 3% for digital-only advice.
Clients prefer emotional support from human advisors: Investors using human advisors estimate being $160,000 closer to achieving their financial goals. Three times as many investors report having strong peace of mind when working with a human advisor compared with going it alone.
Preference for advice delivery is not dictated by age or wealth: Here, the researchers note that they did not find that Millennials’ preferences don’t differ from other generations regarding the automation of service within advice. “Across all generations, wealth levels and advice-delivery types, clients suggest that human advisors should consider automating some portfolio management services,” the study observes. Advisors also should leverage technology to scale their business while strengthening their uniquely human value, it notes.
Value Proposition
According to Costa and Henshaw, investors did tend to favor one mode of advice—human or digital—for different types of advice tasks and services. For instance, investors said they prefer a human advisor when it came to:
- Knowing clients—feeling that they and their retirement goals are understood.
- Developing a connection and relationship with clients.
- Working in clients’ best interests—taking good care of them.
- Making clients feel listened to and understood.
- Demonstrating empathy for clients’ personal situations and needs.
In contrast, when it comes to activities with an emphasis on portfolio construction and more functional tasks, investors prefer the service delivery to be digital and automated in these areas:
- Managing taxes and capital gains efficiently.
- Gathering accurate inputs for clients by helping them understand how to answer.
- Accounting for scenarios of different market conditions or life events.
- Preventing details or entire accounts from being overlooked.
- Diversifying investments.
- Simplifying for organized, cohesive management.
Practice Implications
For human advisors, perhaps the most useful strategy is to figure out how to incorporate both modes of advice into their practice, Costa and Henshaw note. Using certain digital advice technologies for functional tasks and certain portfolio services can help advisors to not only scale their practice but also grow margins.
Accordingly, be sure to highlight your emotional value, as the research suggests this is the top benefit investors attach to a human advisor. “Do you convey effectively that you will partner with clients long-term to reach their financial and life goals? If not, perhaps your marketing or other aspects of your business are in line for a review,” Costa writes. Training your team to improve their “soft skills” might also be appropriate, he notes.
Additional recommendations include reviewing client acquisition and onboarding strategies, with an eye toward attracting digital-only investors willing to switch to a human advisor. “Digital advice users expect a friction-free experience. Make it easy for potential clients to find you, learn about your offer, and sign up with you,” the Vanguard researcher emphasizes.
Moreover, in the context of investor preferences, Costa suggests taking an inventory of all the services and activities you offer clients, and reviewing how your team is aligned with them. “Align your resources to most appropriately fit the business tasks where investors perceive they provide the greatest value,” he emphasizes.
