April 20, 2021

CAN ROBO-ADVISORS HELP FINANCIAL PLANNING PROFESSIONALS?  

Since the beginning of the pandemic, technology has progressed rapidly allowing adjustment to living and working at home. Still relatively new to the industry robo-advising is also progressing rapidly. 

In June 2019, Vanguard’s robo-advisor managed a total of $140 billion and over 10 billion U.S. dollars was managed by the sixth-largest robo-advisor (Statista Research Department, 2020).  According to Investopedia, “The industry has experienced explosive growth as a result; client assets managed by robo-advisors hit $987 billion in 2020, with the expectation of reaching $2.9 trillion worldwide by 2025.” 

What are Robo-Advisors? 

In the interview, Dr. Jason McCarley described robo-advising as a form of automation to create statistical decision aid. He described it to be similar to human interaction with technological systems that are already in place and we are familiar with such auto-pilot systems or a Tesla. Robo-advising is related to how humans interact with automated systems. “It’s to help make choices or make judgments under conditions where there’s a lot of uncertainty,” McCarley said. Robo-advisors have the ability to improve the accuracy of predictions and judgments that humans can make.  

To put it into perspective, McCarley gave another example. This type of technology is used in predicting how well students would do in a graduate program. He explained that it is usually a simple equation but it will outperform humans at predicting success. “We find people underperform these kinds of statistical decision aids. The other thing we find is even though they are better than us, we don’t like to use them or tend to ignore or override the advice,” he said. 

McCarley explained that there are many benefits to robo-advising but what is great about robo-advisors is that decisions don’t need to be made because plans can be automatically opted for. This takes away the confusion of what percentage size to contribute to savings for example as well as what investment to be involved with. 

 The Risks of a Completely Automated System

When it comes to technology, many worry about the risks and the unknowns. McCarley explained that three main things should be looked out for. The first is knowing that occasionally it makes a mistake, so human monitoring is needed to keep a check on the system. The second is that situation awareness can be lost when those become disengaged with financial planning. Lastly, people often don’t trust statistical aids but they do trust other people. However, they are more likely to trust the robo-advisor if it is accompanied by a human. 

What Does a Statistical Decision Aid Do?

McCarley gives an analogy to Spell Check as to how a statistical decision aid works. First, it Informs. In Spell Check, this would be the line to let you know something doesn’t look right. Then it Counsels. In Spell Check, it guesses suggestions for you to replace the word or grammar. Then, it Acts, which is fixing it for you. Spell Check doesn’t act until you command it to, unlike a robo-advisor. McCarley said there is a greater chance for a mistake you won’t catch if it acts by itself. “At each level, it’s taking some of the workloads off for you but it’s also taking a little bit out of the process so you have to work a little harder to keep an eye on what’s going on,” McCarley said. 

Mechanical vs Holistic Decisions

A Mechanical decision is calculated, often doing a better job in performance compared to human decisions, whereas holistic decisions are human-made, explained McCarley. “The first thing we have to recognize is that sometimes the algorithm is wrong, that is the nature of problematic decisions is that we can’t always be right. We have to accept that even though the aid is wrong sometimes, it is probably more right than me,” he said. 

Role of Trust 

When using robo-advisors there is a certain element of trust and willingness to rely on it that must be fulfilled. The first part of trust is working out how good and reliable it is. The more mistakes that happen, the less trusting the user will find it. What’s more, occasional errors can also lead to undermining trust. 

The second part is having an understanding of the process and how it works. When users don’t understand how or why the recommendations or predictions are what they are, it can lead to confusion or even frustration. It’s also important to understand why it may go wrong and that it’s impossible to be correct all the time. 

How Much Will It Cost to Get Automatic Versus Human Advice?

The hope with robo-advisors is that people who don’t have much money to spare will find it worthwhile instead of a human advisor. The hope is to make it accessible and reduce the cost of financial advising. However, McCarley said there has been less uptake than hoped for, but the younger generations remain to be interested. “Old investors and wealthier investors are actually more willing to spend money on a human advisor. They like the interaction and they trust the human advisor more,” McCarley said. 

One of the issues mentioned earlier is that users sometimes “set and forget” when using robo-advising. The best way to avoid misuse in the younger generations or those using robo-advisors is to get the user involved in monitoring the process, explained McCarley. Goals need to be changed when the user’s goals change so the predictions can reflect. Getting involved and keeping on top of updates on their progress stops any surprises, he said.  

Advice to Financial Planning Professional About Robo-Advisors 

McCarley’s parting advice to the financial planning professionals was; “having a financial planner as a liaison between the advisor and the investor fights the problems. The investor probably trusts you so they will take your advice more than they might take the advisor from a computer. Having or wanting a financial planner for human interaction, and having that liaison is valuable for the people who can’t or don’t want to have human interaction. Encourage them to take the advice but know what they are doing,” he said. The advantage is financial planners can leverage the tool and have their clients be actively engaged.  

mccarley-2-3About Jason McCarley:

Jason McCarley is a Professor in the School of Psychological Science at Oregon State University and has previously held faculty positions at the University of Illinois and Flinders University in Adelaide, South Australia. He conducts research in the areas of human factors and applied cognition, with a focus on attention, signal detection, and human-machine collaboration.

Chia-Li Chien, PhD, CFP®, PMP®About the Host:

Dr. Chia-Li Chien is a succession program director at Value Growth Institute, a succession consulting practice dedicated to helping business owners increase their firms’ equity value. Before her private consulting practice, she held several senior management positions in Fortune 500 companies. Dr. Chien is a director of the financial planning program at the School of Management at California Lutheran University. Dr. Chien is a frequent speaker about succession and retirement planning at national conferences and has published three award-winning books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®).

Rosie BakerAbout the Author:

Rosie Baker is an undergraduate student at California Lutheran University, graduating in May 2021. She is studying Communication with an emphasis in PR and Advertising and has a minor in Creative Writing. In July 2020, she published her first book, Mirrors & Windows: Unlocking a New Framework to Envision Your Success, with New Degree Press. 

References:

Statista Research Department. (May 4, 2020). Value of assets under management of selected robo-advisors worldwide as of March 2020 (in billion U.S. dollars) [Graph]. In Statista. Retrieved May 05, 2021, from https://www-statista-com.ezproxy.callutheran.edu/statistics/573291/aum-of-selected-robo-advisors-globally/

Frankenfield, J. (2021, May 7). What Is a Robo-Advisor? Investopedia. https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp

 

Dr. Chien interviewed Professor Jason McCarley, on “Can Robo-Advisors Help Financial Planning Professionals?” on April 20, 2021, at 1:00 pm PST.

The growth of FinTech helps both consumers and financial planning professions in many ways. Financial planning professionals established relationships and trust over time. They guide their clients through their financial journeys. The use of Robo-Advisor is on the rise and is a part of many financial planning professionals’ offerings. In this session, we will discuss the following questions:

  • What are some inherent biases that could harm consumers?
  • What are the variables that influence automation trust and dependence?
  • How to overcome these biases?
  • How to prevent these biases?

Reference:

Bartlett, M. L., & McCarley, J. S. (2019). Human interaction with automated aids: implications for robo-advisors. Financial Planning Review, 2(3-4). https://doi.org/10.1002/cfp2.1059