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Can Financial Advice Fit in an Algorithm?

We can either use these tools to deliver better service to our clients, or we can pretend nothing's changed and work ourselves into obsolescence.

Carl Richards, 04/24/2014

 This article originally appeared in the April/May 2014 issue of Morningstar magazine.

Much of what goes into the craft of financial advice is misunderstood. So much so that a debate has popped up about whether a machine could replace what we do. But what if we're wrong and they're right? Could we be replaceable?

Last December, NPR contacted me for a story it was producing about firms interested in automating the investment process. One firm profiled, SigFig, allows investors to set up their portfolio, and then the SigFig robot manages it automatically. Looking for the fund with the lowest fee? SigFig finds it. Want to build a diversified portfolio? SigFig does that, too. Concerned about your risk level? SigFig aligns your risk with your goals based on your answers to just a few quick questions.

It's an impressive package with a persuasive message. If you're an investor, it's easy to see why it’s really attractive to pay a flat monthly fee to use a service designed for your investing needs. If you're in the business of helping investors, it's easy to wonder if we're about to be replaced by machines. But before you start planning your next career, let's take a look at a couple of things.

1. Robots come with on/off switches. The services that businesses like SigFig, Betterment, and Wealthfront offer are incredibly powerful, but they're also investor controlled. The question still left unanswered is what happens when we have really scary markets. You know, just a normal 20% or 30% decline that lasts more than a few days. My questions: Can an algorithm help a real human being deal with irrational behavior? What will stop investors from turning off the robot and making an emotional decision about their investments? It's a different calculation if someone the investor knows and trusts picks up the phone and says, "Hey, I know things look a little crazy right now, so let's talk about what's on your mind." The physical connection to another person, and the ability to have that conversation, isn't something a tool or algorithm can replace. I truly believe that having someone available to walk you back in from the ledge is irreplaceable.

2. Tools can make you better at your job. I'm a firm believer that if there's something that improves the investor experience, we need to consider it seriously. So, if a client approaches you and asks questions about a new tool or service, don't leap to the assumption that it's about replacing you. Instead, we need to take a close look at what's available and see if it helps us do a better job of serving our clients. For example, I think the biggest difference we can make in our clients' lives is having meaningful conversations. If there's a tool, a robot, or a service that makes those conversations easier to have, then we'd be crazy to ignore them. Plus, if these tools reduce some of our normal grunt work, we can give our clients more quality, one-on-one time.

The desire to solve financial challenges with technology is a permanent part of the financial landscape. On many levels, they've demystified certain aspects of investing and simplified the process for a large number of people at an affordable price. That's a good thing.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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