4 INVESTMENT ADVISOR JANUARY 2018 | ThinkAdvisor.com
How Do Advisors Beat Robos? Trust
No matter how dire some predictions are
for small financial advisory firms, clients
still prefer to trust humans rather than
machines or software, which is likely to
keep an important role for the human
advisor. This personal relationship, which
is marked by trust in the advisor, differs
from the relationship between a person
and technology — though advisors will still
need to rely on tech to advise their clients.
“Technology by itself cannot create
trust,” Robert C. Merton, a Nobel laure-
ate in economics now teaching at MIT,
recently told ThinkAdvisor. “The success-
ful advisor must have the trust of their
clients.” When it comes to trust, he offers
an illustrative example from the field of
medicine. If someone asked an advice
app on a cellphone what to do about a
painful knee, and the app answers “cut it
off” — you would not follow that advice.
“We do not know the motivation behind
the advice. Is it in our interests or some-
one else’s? We do not know the validity of
the model used to reach the conclusion of
the advice given. It could be a very flawed
model. And we do not [know] the data
that were used in the model to reach the
conclusion. It could be poor, incomplete
or biased data and it may have been tran-
scribed incorrectly,” Merton said.
There is a related issue of transparen-
cy. “Financial advice, like medical advice,
is inherently opaque, meaning that it can-
not be made transparent enough to avoid
having to rely on trust,” he added. Given
the importance of trust in the advisor-
client relationship, Merton recommends
• Check what they are doing to retain
and enhance trust with their clients.
• Make sure the business model being
used supports the creation of trust.
• Take advantage of technology to
improve/enhance what the advisor
• Not view technology as a “competitor
or substitute” for the advisor.
• Understand and assess the financial
technology they employ to certify
trusting its use in client solutions.
Moreover, Luis A. Aguilar, a former
Securities and Exchange (SEC) commis-
sioner now on the board of Envestnet and
the board of advisors of Personal Capital,
suggests comparing relationships when
evaluating trust. “A personal relationship
with another human is the best way to
build an enduring trust relationship,” he
said. “I doubt that a machine will really care
about my future and my family’s future.”
But a somewhat differing view comes
from Vasant Dhar, a professor at New
York University’s Stern School of Business.
“Technology can surely create trust on
its own in transporting us if our collective
experience is that it rarely makes mis-
takes and doesn’t kill us. We’re not there
yet,” he said. “But in the world of invest-
ing, which is fraught with uncertainty
and unpredictability, trust is indeed a lot
harder to engender, but not impossible.”
“At the moment, robo-advisors do little
more than portfolio optimization; that is,
given your positions, they tell you how to
size them,” Dhar explained. “This is an easy
enough task, and most people would proba-
bly trust the machine with this simple task.”
However, trust “is harder to create
when a machine makes recommenda-
tions, like ‘buy Google’ without the basis
for such a recommendation,” he said.
It is noteworthy, however, “the bar for
machines isn’t particularly high” when it
comes to making buy/sell recommendations, the professor says; after all, “not
many” human financial advisors outperform the S&P 500 after fees.
According to Dhar, “Trust depends on
the number of data points we observe
during our experience with the tech-
nology …. If you can show clients that
the robot adds value using lots of data
points, they are more likely to trust it.”
From his vantage point, Howard Yu, a
professor of strategy and innovation at
IMD Business School, says robo-advisors
will not put human advisors out of work.
“Financial advisory demands trust,” he
explained. “In other words, that human
interface with empathy and understand-
ing of financial aspiration will always play
an important role. This is akin to health
care. Despite the automation of [the]
human expert, [the] doctor will still be
required, despite their changing role.”
Investment Advisor offers this test for one hour of continuing education credit
from the CFP Board of Standards. Passed tests will be reported electronically to
the CFP Board. Look for the test at ThinkAdvisor.com/ce-center in January.
For inquiries, contact Liana Roberts at email@example.com.
INVESTMENT ADVISOR (ISSN 1069-1731) is published monthly ALM Media, LLC, 4157 Olympic Blvd. Ste 225, Erlanger, KY 41018-3510. Periodical postage paid at Covington, KY and additional mailing offices. Subscription Rate is $79 per year.
POSTMASTER: Send all subscription orders, changes of address and correspondence to InvestmentAdvisor, PO Box 3136, Northbrook IL 60065. Allow four weeks completion of changes
NEW THIS MONTH THINKADVISOR.COM TECHCENTER LIVE EVENTS WEB EXTRAS DIRECTORIES BLOGS
When it comes
to Bitcoin and
advisors will have to
decide how to handle
growing client interest.
FOR ALL THIS AND MORE WEB EXCLUSIVE CONTENT PLEASE VISIT THINKADVISOR.COM