Many articles have been written about the advent of the robo-advisor, with opinions ranging wildly, yet there is little evidence of the impact being felt so far.

While many of the articles are written from the point of view of asset managers about the potential impact of robo-advisors, we wonder what other flesh and blood human advisors have to say about these online critters? Is there any worth in the fee clients pay to these human advisors when, in today’s modern age, we can do most things ourselves through the use of a google search and a mobile device?

With robo-advice being a fairly new advent, it might be useful to explore other examples where technology is currently disrupting our relationships and lives?

Let’s consider banking as an example.  Clients used to have a very personal relationship with their bank. Client and bank manager would golf together and chat about how the farm/business/house was going, and a special seat would be reserved for the bank manager at Ouboet’s wedding. But that was then, and this is now. We want speed, efficiency and immediate answers. So instead of having a banking relationship, we shop around, and use online banking tools to get pre-approval for our mortgage needs. Sounds really great, doesn’t it? Faster, easier and potential approval within minutes. But what about if we can’t get approval for the amount we need? What if, potentially, we are self-employed or have another unique factor that the generic application form doesn’t adequately consider? Ahh, THEN the inconvenience of not having a face to talk to can rub us the wrong way. Try using the technology that has been put in place to replace the human relationship…..  Try and call the bank, surely someone can help you. But who? You never spoke to anyone in the first place. No one met you or knows what you look like. In fact, you may not even be a client of that particular bank as yet – remember, banks get these requests all the time, so how important is your call? Finally, after getting through to someone, ANYONE, all they can really tell you is that they need to send your application form to another department for review. Try call again later, or better yet, the bank will phone you back. Like a teenage girl waiting by the phone, you could be waiting a long time for that call, only for it to come back (if it does) with the same reason for denial of the amount requested as before, because there is no single person who owns the responsibility of approving your bond.

This example is not to malign banks, but merely to help you relate to already concrete examples of the frustration that modern technology can cause us due to a lack of human involvement or personal touch.

Humans are irrational, and sometimes, we need to VENT. When we can’t get through to who we need to speak to, after being transferred for the fourth time back to reception, the poor person who receives the ARRRRRRGH and some carefully chosen words, has their day ruined, but wow, we at least feel 99.9% better.

So how does this tie in to financial advice? Well, humans are emotional beings, and there is a whole field of behavioural finance dishing up all sorts of interesting stats about how our emotional immaturity can cause us financial harm. Two such behavioural finance theories to highlight are loss aversion and recency bias.

Loss aversion is the phenomenon whereby investors experience gains and losses of similar sizes differently. Investors feel the pain of a loss of R100 more deeply than the equivalent pleasure from the gain of R100. We disproportionately weight the feeling of loss. Isn’t this so true? If we check our annual portfolio return and see it has made 15%, we feel happy in that we beat inflation, although we probably expected this and life carries on as per normal. However, if the portfolio lost 10% or even 5%, we feel terrible!

Recency bias is the theory that investors tend to overweight recent experiences when forming a view of the future. As an example, with platinum prices at such lows in 2015, investors tended to believe that prices would NEVER recover, and priced in the future value of those shares with this FOREVER LOW view. For those investors able to recognise this bias, 2016 to date has represented a nice rebound in resources. But just knowing about the irrational behaviour isn’t enough. It is still difficult to stick to your conviction and buy shares that keep going down in value, even when you have the conviction that they are mispriced, and hence, every drop in value is a bigger bargain to be earned in future.

So enough about theory, what are the cold-hard facts? A study done by the Vanguard Group, the world’s second largest asset manager with over US$3 trillion in assets, attempted to quantify the value added to investors by wealth advisors. Their conclusions were interesting. The number they came up with was about 3% p.a in terms of net additional returns from employing an advisor, relative to the average client experience. It is not the number that is so important, but rather, the composition of the number. Half the number, or 1.5%, was derived solely from behavioural coaching ie guiding clients in sticking to their personal plans, or, managing their behaviour. It was found that value added from choosing an appropriate fund manager or even structuring a portfolio to be secondary. The other 1.5% performance gain from employing an advisor is comprised of a combination of fund selection and advice with regard to structuring products for tax efficiencies.

Having that outside opinion/voice of reason is essential to helping investors achieve their stated financial goals and plans. In other behavioural finance studies, women were found to be better investors than men, the main reason, in summary, being that women are more conservative and men are over-confident, resulting in men trading more frequently than women, and women adopting a more “Buy-and-hold approach”, which is proving to be more successful. When one is tempted to panic sell or move assets offshore, or deviate from a set plan, it is often the re-assuring voice of a financial advisor that is needed to calm the waters and restore sense. The same goes for when shocks in the market occur (think Nenegate/Brexit). These result in paper losses or “unrealised” losses. Investors listen to all the media noise and are often tempted to sell, resulting in permanent or “realised” losses (the fall in the value of their portfolios). This is where the financial advisor really earns his pudding, as what is really needed, is a loving arm around the shoulder and a soft re-assuring voice to remove the doubt, panic and worry, so that better investment decisions can be made.

Now imagine the world of the robo-advisor. We did a quick assessment of our financial needs and our risk profile and were given some asset management options. We even used the recommended asset manager, in the recommended fund at the recommended value.

But along came Brexit/Nenegate/YouNameIt, and we want to make changes to our plan. So let’s phone the robo-adv… whoops. Can’t do that. But now I am scared, as I am a sophisticated investor, and I am aware that I am at risk of irrational behaviour. Who can I turn to? Well, maybe the Asset Manager, who is also responsible for the returns of the fund in which the robo-advisor recommended.

Ring, ring. 

“Hi, I am investor X calling about your fund.” 

“Sorry sir, by law, we cannot give investment advice. We can explain why the fund has performed poorly, which was due to YouNameIt (which you already knew), but we can’t tell you what you should do next.”

“But the robo-advisor was designed by you, Mr Asset Manager, and its recommendations were made according to your programmed algorithm. Who can I shout at, vent at, unleash my fury at?”

“Are you married, sir?”

So, for the sake of our spouses, lets re-consider the real value of a financial advisor. Until our Robo-advisor have EMOTIONAL intelligence as well as Artificial Intelligence and can put an actual robo-hand around our shoulders, maybe keep that seat open at Ouboet’s wedding for Mr 3% p.a. and demote the bank manager to the cheap seats.