Robo-Advisors Appeal Most to Investors Afraid of Getting Ripped Off

Investors worried about being cheated by financial advisors are more likely to exclusively use robo-advisors, says a recent study.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Robo-advisors are often seen as complementing human financial advisors. However, a recent study suggests that for many investors, particularly those leery of the integrity of financial service providers, robo-advisors offer a satisfactory substitute for human advice.

Moreover, the study indicates that once investors sample robo-advisors, they often lose interest in returning to the analog world of handshakes, Post-its, and pens that run out of ink.

The University of Marburg’s Lukas Brenner and University of Giessen’s Tobias Meyll argue that robo-advisor use is “strongly negatively related” to using human advisors. They say that those using robo-advisors are 15.8 percent less likely to consult with human advisors.

The survey for this study examined feedback from 2,000 U.S. investors and indicated that 16% had used a robo-advisor.

“The substitution effect of robo-advisors is especially driven by investors who fear to be victimized by investment fraud” as well as “potential conflicts of interest.”

In short, trust is a must.

If trust is not underpinning the relationship between a financial institution and client, there’s a much greater chance that the client will opt for a robo-advisor, says the paper, citing potentially “detrimental consequences” for banks, brokers and insurance companies that solely rely on financial advisors.

And though it may seem unfair, sometimes it’s not enough to be honest. Advisors must also be perceived as honest in their dealings with clients and prospective clients. Part of building that impression involves effective communication.

“Financial institutions – whether offering human financial advice, robo-advice or hybrid models – are advised to continue in their vital efforts of building client-relationships based on trust in order to perceive robo-advisors as a complement, rather than a substitute, to human financial advice.”

While robo-advisors may work fine for many investors, those choosing them for reasons borne of mistrust often miss out on superior advice. The study says that users of robo-advisors “show lower levels of financial literacy.”

It also indicates that robo-users tend to exhibit “higher risk attitudes and are more likely to be Millennials.”

Another study suggests that those most in need of high-quality financial advice are generally the least likely to receive it. Though this study focused on investors 50 and older, the correlation between increased financial literacy and the pursuit of higher quality advice appears to apply across generations.

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