Technology has made everything better, faster and cheaper over the years, and investing is no exception. In fact, many robotic advisory firms have launched in the last 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? Self-driving cars may soon be ready for prime time, but are we ready for wallets without humans?
Artificial intelligence based on the recognition of historical patterns is already widespread 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. Similarly, computers are great 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, stock markets dropped almost 1,000 points or 9% without warning. The entire debacle lasted 36 minutes as the stock market fell and then quickly recovered. Program traders who had automatic stop loss orders lost millions when the sale triggered computer programs to initiate even more sales. The computer programs simply executed the instructions set forth by their algorithms, namely: “In a significant bear market, take losses and sell no matter what.”
The programs were not smart enough to assess the different possibilities of market downturn, including the possibility of a system malfunction. Like good soldiers, these programs carried out their duties exactly as described. There was no chance of the ‘programs’ going off the rails or stopping to reflect.
This is where human wisdom surpasses even the most sophisticated artificial intelligence. Humans are not only flexible by nature, but our instincts give us an uncanny ability to assess all forms of information, including the absence of information.
Have you ever seen a magician do the ‘disappear in the box’ or ‘take a bullet in the mouth’ trick? Although the trick has all the appearance of realism and although we cannot explain how the trick is done, we know that we are victims of an illusion. The magician is playing with us. The ‘how’ is not known, but the magician certainly did not disappear or receive a real bullet in the mouth.
Human insight and innovation picks up where rule-based, automated tools leave off. We human beings still do a better job of choosing friends, partners, and careers that will give us a satisfying future than a computer. A GPS device can help us navigate our way through a maze of hiking trails, but it can’t necessarily plan the sights we want to enjoy along the way.
Each client’s situation is unique and dynamic. An experienced advisor can leverage an individual connection into a personalized recommendation that transcends a simple forward-looking algorithm, even as his life and her career take many devious turns.
By contrast, pure robo advisors generally rely on a 10-point questionnaire to summarize their client’s situation. For millennials at the beginning of their wealth-building years, the lack of a human element in the investment decision-making process is acceptable. The accounts are small, usually in the tens of thousands. In a small portfolio, higher fees from an active human advisor are likely to offset any benefits.
But once these same millennials have amassed a little more wealth, they’ll need to direct it toward varied and specific goals, like buying a home or business, putting the kids through college, retirement, estate planning, and a host of others. matters related to wealth management. that will add value, security and peace of mind to their lives.
These things require wise and evolving asset allocation, tax-efficient planning, and a few quick turns to keep up with life’s surprises…like babies, new jobs, new careers, and unexpected moves or expenses. Unless your robo-algorithm follows you on Facebook, it’s unlikely you’ll be able to adequately respond to the dynamism, uncertainty, and solidity of your life.
Clients likely to benefit most from a hybrid robot-human approach are professionals, corporate executives, and budding entrepreneurs. These investors are likely to adopt the technological aspect of a robotic 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 leaks to occur.
Remember robocop? The 100% robotic cop had no human sense or instincts, just hardware and robotic algorithms. But the cybernetic-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 much better. A cybernetic organism (or “cyborg”) offers the best of both worlds.
Your short-term losses now may help your robotics firm tweak its algorithm to make it better next time, but your friendly advisor already has the experience to see some market events and personal events coming. 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 a prime example of an outcome that was difficult to predict and actually proved the pollsters wrong. Placing some hedges through put protection to temporarily protect the portfolio was not only prudent a week before the vote, it also made a lot of financial sense. Knowing how far to hedge, the strike price of put options, and ultimately when to withdraw hedges is a much more complicated decision than several ‘if-then’ line items of code.
It is also beneficial to have an advisor who knows the various members of your family who are affected by the wealth management decisions that are made. That knowledge is incredibly important and can make all the difference in formulating a plan. Or the advisor may have had first-hand experience helping other clients through similar life/investing events, and gained hard-earned insights 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 robotic advisor give thoughtful advice on well-planned wealth transfer to the next generation? Or about the tax efficiency of selling a business? Can a smart phone with a fancy app offer the best personalized human options to a businessman or corporate executive on how 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 an automated trainer is good enough on its own to take the Chicago Cubs to a World Series or the Toronto Maple Leafs to a Stanley Cup, we can begin decrescendo our reliance on human advisors. But until then, it helps to have a star financial quarterback to fully integrate technology and deal with ever-changing situations.