Robo or human advice? Investors want both in one place

Commentary by Paulo Costa, Ph.D. , Behavioral Economist

As digital "robo-advice" offerings have expanded in scope and availability, questions have arisen about the future of traditional advice given by humans. Will digital advice take over?

Our research finds that human-advised clients are, in fact, not likely to switch to digital advisors. Quite the opposite, 9 in 10 robo-advised clients are considering switching to a human advisor in the future. 

At the same time, clients believe that there is some room for automation of services in a practice.

For human advisors, then, perhaps the most useful strategy is to figure out how to incorporate both modes of advice into their practice. We asked 1,500 advised clients in the United States about loyalty and perceptions regarding both types of financial advice. 

Among our findings:

• Advice adds value across the board: Regardless of the method of delivery, investors believe 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.
• Preference for financial advisors is enduring: While more than 90% of human-advised clients say they would not consider switching to a digital service, 88% of robo-advised clients would consider switching to a human advisor in the future. However, time, willingness, and ability to manage investments seem to play a critical role in determining the choice of advice delivery.
• 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 as compared to going it alone.
• Digital also serves a role for clients: Our findings also uncovered specific areas where investors prefer digital advice, such as for certain portfolio-management services (e.g., diversification and tax optimization).
• Preference for advice service delivery is not dictated by client age or wealth: Contrary to popular belief, we do not find that millennials have distinct preferences 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. Advisors should leverage technology to scale their business while strengthening their uniquely human value.

 

Quantifying how investors value advice

Clearly, investors want financial advice and find it valuable. Our survey asked investors to estimate their annual portfolio returns achieved with whichever mode of financial advice they used. It then asked them to estimate what they thought their returns would be over a three-year period without the assistance of their advice service. 

Individuals working with human advisors estimated that on an annualized basis, they achieved a 15% average return with the help of their advisor, and estimated they would have seen only a 10% return if they had been unadvised—making a perceived value-add to annual performance of 5%.

Those with digital-only advice reported perceived average portfolio returns of 24% using their digital advice service. They estimated their return would drop to 21% if they did not use a digital advisor—making a perceived value-add to annual performance of 3%. 

 

Investors believe human and digital advisors provide substantial portfolio value

 

Notes: Respondents were asked, "In your experience with your human (or digital) advisor, what would you estimate your average annual investment returns to be in the past three years? If you have not had an advisor for three years, think about the relationship you have had with your advisor thus far."

Respondents were also prompted to estimate their average annual investment return while working with their human (or digital) advisor. They were then told to imagine they did not have their advisor and instead managed their investments on their own. Given those circumstances, they were asked, “What would you imagine your average annual investment returns to be in the same period?”

Sources: Vanguard and Escalent, 2021.

 

Human advisors still hold an edge

While the advice landscape is indeed evolving with the breadth and depth of digital offerings becoming available, our research indicates investors maintain significant loyalty to human advisors.

Survey participants were asked, "If you had to leave your current [human] advisor today, what type of advising relationship would you search for in the future?"

For investors that already use a human advisor, 93% said they would choose an advice service that includes a human advisor in the future. Despite the common headlines about technology replacing humans, our data suggests that investors have strong loyalty to keeping a human financial advisor.

 

Investors with a human advisor not likely to switch to robo-only

 

 

Note: The sample in this figure includes all responding investors who only have human advisors (1,175 in total).

Sources: Vanguard and Escalent, 2021.

 

Conversely, such loyalty did not exist when it came to digital-advised investors presented with the potential opportunity to hire a human replacement. When we asked current robo-advised clients about their future preference for advice delivery, 88% of those clients said they would be willing or extremely willing to work with a human advisor in the future. 

We believe this has strong business-development implications for human advisors: Robo-advised clients could represent an untapped and under-targeted market to convert for human advisors, especially as those investors’ needs become more complex.

 

Digital-advised investors are willing to switch to human advice

Respondents were asked, "on a scale of one to seven, how willing would you be to work with a human financial advisor in the future?"

Note: The sample in this figure includes all responding investors who only have digital advisors (135 in total).

Sources: Vanguard and Escalent, 2021.

 

Know what type of value you provide

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 preferred 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.

When it came to activities with a strong emphasis on portfolio construction and more functional tasks, investors preferred the service delivery be digital and automated:

• 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 (what-ifs).
• Preventing details, or entire accounts, from being overlooked.
• Diversifying investments.
• Simplifying for organized, cohesive management.

 

Implications for your practice

Human advisors can take away a number of action items from this research in order to remain competitive in the evolving advice landscape.

• Foremost, be sure to highlight your emotional value. As our research affirmed, 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. Upskilling for you or your team on “soft skills” might also be appropriate.
• You can also thoughtfully review your client-acquisition and onboarding, with an eye toward attracting digital-only investors who are 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.
• Referring back to our list on investor preferences—how are you and your team aligned with them? If you haven’t already done so recently, now would be a good time to inventory all of the services and activities you perform on behalf of clients.
• Align your resources to most appropriately fit the business tasks where investors perceive they provide the greatest value. In other words, are people aligned to the emotional and financial outcome value tasks? Is technology assigned to the portfolio tasks that can be automated? If not, a good action step might be to investigate tools that can make you more efficient.