Researchers at financial giant Vanguard Group, which manages $8.1 trillion in assets, published a report this week affirming something that many wealth managers have been saying for years: Robo-advisors aren’t a threat to the human variety. In fact, investors working with human advisors want to stick with them, and investors using digital-only advisors would consider a switch.
Vanguard learned that and more from a July 2021 survey of 1,500 investors who reported that they have a human advisor, use a digital service, or both.
“We found that digital services do not pose a threat to an advisor’s existing book of business,” Paulo Costa and Jane Henshaw said in the research paper they authored. Costa, who has a doctorate in economics from Harvard University, is a behavioral economist at Vanguard. Henshaw, who has a master’s degree in behavioral and decision sciences, heads up Vanguard’s Investor Behavior and Digital Research teams, which use behavioral science and quantitative models to understand how web and mobile environments influence financial decisions.
More than 90 percent of human-advised clients would not consider switching to a robo-advisor, according to the survey. Meanwhile, 88 percent of robo-advised clients would consider using a human one.
At least one study suggests that many investors, particularly those leery of the integrity of financial services providers, prefer robo-advisors and believe they offer a satisfactory substitute for human ones.
However, management consultants say that independent, digital-only wealth managers would need to achieve massive scale to be successful. Most have gone out of business, hired human advisors for clients who want to work with them, will be forced to raise more capital in the future, or have sold to more traditional wealth managers. In January, Wealthfront, the robo-advisor that said on its website, “If you use advisors, you’re never sure whether they’re making the best decisions for you...or for themselves,” was acquired by UBS.
Wealth management firms see value in both digital and human advisory because investors perceive the value of each differently.
In its recent paper, Vanguard quantified the value that investors perceive in human and digital advice across portfolio, financial, and emotional outcomes. “We found that human agents excel in all dimensions by providing an additional perceived 5 percent in returns, $160,000 in financial success toward goals, and three times the emotional support, as compared to investors managing their investments on their own,” the paper says.
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Investors overwhelmingly want to develop a relationship and connection with a person who they feel will listen to them, be more empathetic, and give them confidence in their financial decision making.
The results of Vanguard’s research span all generations, wealth levels, and advice-delivery types, which is “good news” for advisors. Wealth managers can “scale technology to their entire client base. Investors also agree that human advisors excel in helping them achieve financial success and providing emotional peace of mind. By outsourcing portfolio construction and functional tasks, advisors can scale their business models and focus on delivering uniquely human skills.”
Mike Sha, co-founder and CEO at SigFig, a company founded in 2006 that builds digital wealth management tools for some of the world’s largest financial institutions, says his company has always believed in the value of human advisors.
“The Vanguard research supports our own: The desire for human advice is largely consistent, regardless of wealth level. We believe that technology can help automate tasks, leaving advisors with more time to interact and engage with clients and closing the ‘advice gap,’” Sha told RIA Intel.
One of the most important trends in the coming years will be increasing and improving remote access to human advisors, Sha said. “This will result in more people with access to financial advice in the moments that they need it the most.”
Michael Thrasher (@Mike_Thrasher) is the editor of RIA Intel and based in New York City.