As technology continues to advance, many are wondering whether AI can eventually replace human financial advisors. Robo-advisors like Wealthfront and Betterment have made significant strides in automating investment management, offering low-cost, algorithm-driven financial advice.
However, their capabilities remain limited when it comes to providing a holistic view of your financial situation and offering personalized, nuanced guidance.
The true value of human financial advisors extends beyond basic investment management. Advisors act as coaches and counselors, asking the right questions to offer comprehensive recommendations that cover advanced tax strategies, estate planning, and more.
This article explores the six core functions of human financial advisors that AI has yet to fully replicate.
Comprehensive Portfolio Tracking
Robo-advisors excel at managing and tracking liquid investments, such as stocks, bonds, and ETFs. They use algorithms to automate asset allocation, regularly rebalance portfolios, and optimize for tax efficiency within these liquid assets.
However, they typically do not account for the entirety of an individual’s wealth, such as equity locked up in real estate, private investments, or other non-liquid assets.
Human advisors can take into consideration all types of assets, providing a more holistic view of your financial situation. They can incorporate non-liquid assets into their planning and recommendations, offering nuanced financial advice that captures your overall financial health.
Investment Advice
This is where robo-advisors really make their mark. They provide automated investment advice based on your risk tolerance, investment goals, and time horizon. They optimize asset allocation, offer low-cost investment products like ETFs and index funds, and automatically rebalance portfolios.
However, their advice is often limited to the assets they manage and lacks the ability to provide advice for unique personal circumstances or changing market conditions.
Human advisors offer “true investment advice” that goes beyond mere percentage allocations. They consider changes in your personal life, market anomalies, and other external influences. Additionally, human advisors provide emotional support during market volatility, helping you navigate your responses and maintain a long-term perspective.
Tax Optimization
Robo-advisors offer some tax optimization features, typically tax-loss harvesting. This involves automatically selling securities at a loss to offset gains and reduce taxable income. These automated systems are efficient at identifying opportunities for tax savings within the scope of the investments they manage.
However, the tax optimization provided by robo-advisors is generally limited to basic strategies and within the confines of the assets they oversee. They typically do not offer personalized tax planning that considers your broader financial picture or more complex tax situations.
Robo-advisors may miss opportunities that arise from business ownership, changes in income levels, or other tax circumstances.
Human financial advisors engage in detailed, iterative conversations with clients to uncover specific opportunities for tax savings.
For example, discovering that a client runs their own business might lead an advisor to recommend forming an S Corp, allowing the client to take profits as capital distributions rather than ordinary income, thus saving on taxes. They may also work with tax attorneys for more complex situations.
Human advisors also offer tailored advice on how to withdraw funds from retirement accounts in a tax-efficient manner, manage taxable events strategically, and utilize various tax-advantaged accounts and deductions.
Scenario Planning
Robo-advisors provide tools for basic scenario planning, helping clients estimate their retirement needs and project future savings. However, these tools often rely on static models and predefined inputs, lacking the flexibility to adapt to dynamic and complex financial situations.
Human advisors offer detailed, customized scenario planning, considering a wide range of potential future scenarios. They work closely with clients to adjust plans as circumstances change, providing nuanced recommendations for various what-ifs, such as market downturns or significant life events. This level of personalized, adaptive planning offers you peace of mind and a clear strategy for navigating life’s uncertainties.
Estate Planning
Robo-advisors offer basic estate planning resources, especially guidance on beneficiary designations and perhaps simple wills or trusts. However, their capabilities are typically limited and may not address the complexities of your full financial and familial situation.
Human advisors work closely with clients and legal professionals to draft detailed wills, trusts, and other legal documents tailored to the client’s specific needs. They navigate complex family dynamics and legal concerns, ensuring that all assets are accounted for and protected according to your wishes.
For example, a human advisor might recommend setting up a trust to protect your child’s inheritance from an untrusted spouse or to ensure that a special needs dependent is provided for without jeopardizing their eligibility for government benefits. These recommendations often arise from in-depth, human-to-human conversations where sensitive family dynamics and personal preferences are discussed openly.
Counseling And Coaching
Robo-advisors are designed to manage investments and optimize portfolios based on algorithms, but they lack the human touch that is essential for effective counseling and coaching.
Financial decisions are often influenced by emotions, and clients frequently need reassurance and guidance to stay the course during volatile markets or personal financial crises.
Human advisors excel in this area, providing empathy and advice that goes beyond numbers. They build relationships with their clients, gaining a deep understanding of their financial behaviors, fears, and aspirations. This allows human advisors to offer tailored advice and emotional support, helping you make informed decisions and avoid common pitfalls driven by fear or greed.
For example, during a market downturn, a robo-advisor might suggest holding the course based on historical data, but a human advisor can provide context, share experiences from past downturns, and offer emotional reassurance. This human connection can prevent clients from making rash decisions like selling off assets during a market dip.
Will AI Ever Replace These Human Advisor Functions?
Alex Harmsen, founder of AI-powered investment advisor, Portfolio Pilot, believes it is possible. His company centers on portfolio tracking and investment advice but they are currently working on expanding to more advanced financial services like tax strategies, scenario planning, and estate planning.
“Eighty or ninety percent of the base is there already. And so adding these additional features feels like a massive unlock and makes the entire experience more powerful, more integrated, more useful,” he says.
Nonetheless, Harmsen knows that they have their work cut out for them. For example, in order to get people to trust the investment advice his platform gives, they are building in robust explanations for the advice that they offer. They are also working on an AI assistant that can extract some of this essential information needed to provide holistic financial advice.
Undoubtedly large robo-advisors like Wealthfront and Betterment are working on similar solutions, and Alex has high hopes that the technology is already available and is only getting better.
However, as of now, AI cannot replace the nuanced, comprehensive, and personalized advice human financial advisors provide.
Final Thoughts
While AI and robo-advisors have transformed some aspects of financial management, especially investment advice, the core strengths of human financial advisors remain indispensable.
Human advisors excel in understanding a client’s unique financial situation, offering personalized advice, optimizing complex tax strategies, and nuanced planning for future scenarios. Their ability to provide empathetic counseling and build trust sets them apart from robo-advisors and AI-powered tools.
Nonetheless, this is not a zero-sum game. Advisors who take a hybrid approach, maximizing AI’s efficiency in certain areas and combining it with a human touch, might very well be the most advantageous for clients.
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