Robo-Advisors combine technological precision with human wisdom

Technology has made everything better, faster, and cheaper over the years, and investing is no exception. In fact, many robo-advisory firms have launched in the past five years touting the benefits of algorithmic investing rather than human selection. But in a world where convenience sometimes seems to trump participation, can we really trust the wonders of our modern age to the fullest? Driverless cars may soon be ready for prime time, but are we ready for human-free wallets?

Artificial intelligence based on historical pattern recognition is already ubiquitous in our society. Take Waze or Google Maps; most of the time we only need to type three or four letters and the system knows exactly where we want to go. Likewise, computers are excellent at processing rule-based algorithms. But there are still some things that require the kind of vision, sensitivity, and insight that only a human being can offer.

For example, during the Flash Crash on May 6, 2010, at 2:32 pm, the stock markets fell without warning by nearly 1,000 points or 9%. The whole debacle lasted 36 minutes when the stock market fell and then quickly recovered. Program traders who had automatic stop loss orders lost millions as the sale triggered computer programs to initiate even more sales. The computer programs were simply executing the instructions set out by their algorithms, namely: “In a significant bear market, take losses and sell no matter what.”

The programs were not wise enough to assess the different possibilities of market downturn, including the possibility of a system malfunction. Like good soldiers, these programs carried out their functions exactly as described. There was no chance that the ‘programs’ would drift off track or stop to reflect.

This is where human wisdom outperforms even the most sophisticated artificial intelligence. Human beings are not only flexible by nature, but our instincts give us an amazing ability to evaluate all forms of information, including the absence of information.

Have you ever seen a magician do the “disappear in the box” or “catch a bullet in the mouth” trick. Although the trick has all the appearance of realism and although we cannot explain how it is done, we know that we are victims of an illusion. The magician is playing with us. The “how” is not known, but with certainty the magician did not disappear or receive a bullet in the mouth.

Human knowledge and innovation pick up where rule-based automated tools end. Humans still do a better job of choosing the friends, partners, and careers that will give us a satisfying future than a computer. A GPS device can help us navigate a maze of hiking trails, but it cannot necessarily plan the views we want to enjoy along the way.

Each client’s situation is unique and dynamic. An experienced advisor can take advantage of an individual connection on a personalized recommendation that transcends a simple algorithm that looks to the future, even when his life and career follow many winding turns.

In contrast, pure robo advisors generally rely on a 10-point questionnaire to summarize their clients’ situation. For millennials beginning their wealth-building years, the lack of a human element in the investment decision-making process is acceptable. The bills are small, usually in the tens of thousands. In a small portfolio, the higher fees from an active human advisor are likely to neutralize any benefits.

But once these same millennials have amassed a little more wealth, they will need to orient it toward varied and specific goals, like buying a home or business, getting kids through college, retirement, estate planning, and a host of other. other wealth management problems. that will add value, safety and ease to their lives.

These things require smart and evolving asset allocation, tax efficiency planning, and a few quick twists to keep up with life’s surprises … like babies, new jobs, new careers, and unexpected moves or expenses. Unless your robotic algorithm follows you on Facebook, it is unlikely that you will be able to respond adequately to the dynamism, uncertainty and robustness of your life.

Clients likely to benefit the most from a hybrid robo-human approach are professionals, corporate executives, and budding entrepreneurs. These investors are likely to adopt the technological aspect of a robo-advisor, while their professional status requires an investment expert to guide their asset allocation, tax planning, etc. The more wealth, the more opportunities for cracks to form and leakage.

Remember Robocop? The 100% robotic cop had no sense or human instincts, just robotic hardware and algorithms. But the cyber-human robot with a real human mind had all the strength and technology of the robot plus a real human intellect to guide it. That worked a lot better. A cybernetic organism (or “cyborg”) offers the best of both worlds.

Your short-term losses may now help your robotic company adjust its algorithm for better next time, but your friendly advisor already has the experience to see some market events and personal events coming up. Other times, a good advisor will know what risk measures need to be put in place to help deal with potential unforeseen events or unknown outcomes.

Brexit is an excellent example of an outcome that is difficult to predict and, in fact, proved pollsters wrong. Placing some hedges through the sale protection to temporarily protect the portfolio was not only prudent a week before the vote, but it also made a lot of financial sense. Knowing how far to hedge, the strike price of put options, and ultimately when to hedge is a much more complicated decision than multiple order lines of “if-then” code.

Likewise, it is beneficial to have an advisor who knows the different members of your family who are affected by the wealth management decisions that are made. That knowledge is incredibly important and can make the decisive difference in formulating a plan. Or the advisor may have had first-hand experience helping other clients through similar life / investment events and have gained hard-earned knowledge that he or she is happy to pass on.

Life is complicated. Technology can help us get the best results from the decisions we make, but it can never make those decisions for us. Can a robo-advisor give insightful advice on well-planned wealth transfer to the next generation? Or about the tax efficiency of the sale of a company? Can a smart phone with a fancy app offer the best personalized human options to an entrepreneur or corporate executive on how the expansion will affect their cash flow over the next year? Uh no.

Winning coaches need a Peyton Manning, and successful executives and entrepreneurs want that star financial quarterback with the knowledge, experience and instincts to handle their investment affairs, too. When a robot coach is good enough on his own to lead the Chicago Cubs to a World Series or the Toronto Maple Leafs to a Stanley Cup, we can begin the decline of our reliance on human advisers. But until then, it helps to have a star financial quarterback to fully integrate technology and deal with ever-changing situations.