In the summer of 2013, I fielded a prospect call from a teacher and her husband. They were in their mid-30s, cleaning up some outstanding issues in their financial situation and ready to start planning for their future. They were well educated (both having Master’s degrees), had a solid combined income, and were well versed on financial matters. They had some investable assets in non-company retirement accounts but were looking to find someone who had experience with teachers to help them with their situation.
It seemed like a no brainer to me – we were going to work together.
But it wasn’t to be. They told me “No”, went off to use a robo-advisor for investment advice, and didn’t retain an advisor to answer their other questions.
I sat stunned in my chair. I didn’t think that a robot would beat out custom-tailored advice designed specifically for teachers. But it did – and here’s why:
Price vs. Perceived Value
I don’t aim to compete with the pricing of a robo-advisor, nor will I ever. If a prospect has a $100,000 account with a robo-advisor, and they charge 0.15-0.5% to manage an account over the span of a year, I’m not going to be able to compete.
While my pricing to set up an allocation for a client and look at it again in a year is somewhat comparable, it’s just not as sexy as having a robot set it up in two minutes and review it constantly.
But I wasn’t talking to these people about just investment advice, I was talking to them about spending $200/mo. to have their entire situation analyzed and optimized. This is far more valuable than just investment advice, but that may not have been what they were looking for. They placed more value on having their accounts invested for a lower fee than having a comprehensive plan.
Their problems will still be there
The teacher in this relationship had 3 different state pensions. In having conversations with each pension system, she still wasn’t sure of her options and decided she needed expert help. Over the phone, I was able to explain her basic options but also explain that further analysis needed to be done. By procrastinating, the costs to solve this issue will get more expensive, and a robo-advisor won’t know the answer, so they may still come back for help.
Robots can’t talk
In my 60-minute conversation, I got to see how this couple interacted, who was nervous or confident about money, what level of financial literacy each had, and how this would play into a planning relationship. By working with a robo-advisor, they will most likely get their investing needs met, but who will explain to them how their investments work? Who will calm them when a sharp downturn comes? And who will be able to adjust their allocation knowing that their pension system just changed its benefits? That’s only something a human advisor can do.
Relationships rule all
I truly wish this couple the best as they navigate their financial lives, whether it is with a robo or human advisor. But I believe that the topic of money and investing is not one to be guided by an algorithm – it’s to be guided by a human relationship.
Robo’s and human advisors can work hand-in-hand to provide this advice, but when you rely on a robot to help you manage your financial life, it doesn’t help you understand your situation. When a prospect is looking for answers and values the time, qualifications and experience of the person providing it, it’s at that point that great progress can be made in helping someone understand their financial situation and beliefs. Upon reflection, my prospects didn’t want that. Whether the price was too high or the perceived value wasn’t there, the services offered by a robo-advisor were valued more highly. And that’s ok.