Artificial intelligence (AI) is a growing arena within the investment management industry. Robo Advisory firms are built online to provide investment guidance and portfolio management by utilizing algorithms for decision making. Although investment portfolios using computer algorithms is more accepted among a younger audience, 60% of Millennials and Gen-Xers still prefer to have a personal financial planner to manage their investment accounts, as shown in the graph below (wealthmanagement.com).
Someone who uses a robo-advisor is looking for low management fees and is typically at the beginning of the wealth accumulation phase (nerdwallet.com). Artificial intelligence is still prone to computer failures and incorrect conclusions that can generate a loss in your accounts. It is not a fool-proof way to invest. Robo-advisors also lack in the area of providing complex solutions around tax efficiency or any significant shifts in the market.
On the other hand, personal financial advisors cost more in fees (roughly 1%-2% more than robo-advisors, according to Seedly), but they provide in-depth specialized services that would be difficult for an algorithm based portfolio to manage.
Here are some specialized services that financial advisors may provide to clients:
Active management throughout the business cycle
Ongoing financial support through life changes
Tax loss harvesting
Retirement funding strategies
Estate and legacy planning
Do you trust a machine or human beings to be decision makers for your future wealth and lifestyle options? Does your investment portfolio require active management and a variety of financial advisory needs, or do you feel comfortable with the simplicity that AI offers? When you can answer these questions, then you will know if AI is right for you. We explain more about robo-advisors in our Build Your Wealth podcast episode “Not All Advisors are the Same.” Our Build Your Wealth podcast is an education program where we provide educational insights about financial planning and investment management. Listen Here!