Man vs. Machine: Why Human Advisers Are Better Than Robo-Advice

Man vs. Machine: Why Human Advisers Are Better Than Robo-Advice
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Remember the last time you called a customer service number and got connected to a machine? How about the last time you asked Siri for something and it completely misunderstood you? It can be incredibly frustrating to need assistance with a problem, only to be connected to a robot that doesn’t really understand your needs. “I just want to talk to a real person!” As rational and emotional beings, we intuitively understand human problems in a way that robots never will.

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Now, imagine it’s 2008. Your investment accounts are steadily declining, and you feel stressed about it. You wonder whether you should ride out the storm or move your investments to cash. You call your investment adviser, desperately seeking guidance and . . . you’re connected to a robot.

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While computers and machines are incredibly valuable, in the field of investment advice they are best used in conjunction with human effort, not in place of it. Simply put, a (human) investment adviser understands an investor’s unique needs and provides guidance and tranquility better than a robo-adviser.

Understanding robo-advice

The investment adviser vs. robo-adviser is often framed as man vs. machine, but in reality, it’s man and machine vs. machine. Most investment advisers use computers to provide services to their clients. In contrast, robo-advisers use machines (e.g. a standardized web questionnaire) as the primary basis of advice. Although some robo-advisers allow for interaction with a human adviser, there is usually a “layering” of machine-interaction before the human can be reached. And access to the human adviser is initiated by the investor, who must know what questions to ask and when to ask them.

The driving force behind the move to robo-advice seems to be their lower fees. But it is important to remember that robo-advisers cost less than their human counterparts precisely because they generalize advice and limit human interaction. When you are entrusting your retirement savings to someone, you want a real person that knows you and can provide personalized advice, not a cheap algorithm that is investing your money based on your answers to a few questions.

Investment advisers provide guidance and stability amidst market turmoil

Human advisers provide confidence and objectivity amidst market volatility. Like the ocean, financial markets can be calm and steady or volatile and turbulent. When investors see their hard-earned savings fluctuating (especially downward), they tend to make emotional decisions.

A study by Dalbar, a financial market research firm, showed that individual investors’ stock returns showed the greatest underperformance of the S&P 500 index during periods of high market volatility. For example, in October 2008, the S&P 500 started above 1,100 but occasionally closed in the 800s. At the end of the month, the index was 14% off the lows, but the month had seen drops of up to 27%. During that month, the average stock investor underperformed the market by over 7%. The Dalbar study attributed this underperformance to bad investor decisions at critical high-emotion points in history. It can prove extremely difficult to maintain an investment plan during times of stress and market volatility, let alone one built on a web-based platform’s initial questionnaire.

Robo-advisers do not provide a buffer between market turbulence and emotional decision-making. An individual may feel like they’ve hired an “adviser” when using a robo platform, but they are still able to quickly alter their entire investment strategy with a click of a button, without ever receiving a second opinion from their adviser.

In contrast, a human investment adviser can provide a source of calm and objective analysis when market fluctuations may tempt an individual to make drastic changes.

Investment advisers better understand an individual investor’s unique needs

Truly knowing an investor requires a relationship, one developed through conversation and interaction, not just a set of questions on a computer screen. To be sure, both human and robo-advisers ask their clients questions about their financial situation and goals. But a financial questionnaire provides only basic information about an investor’s goals and needs, not the whole picture. An investor’s personality and passions will often influence his investment decisions, and these intangibles are difficult to capture in a simple questionnaire.

For example, a charitably-minded investor may prefer to give away most of his wealth in support of a particular charity. Another may desire to build his family’s legacy as one that supports philanthropic efforts in the developing world. These preferences and desires are ones that will affect an investor’s decisions throughout his lifetime, not just at one particular time when he answers a questionnaire. Because he really knows the investor, a human adviser is better equipped than his robo counterpart to handle this reality by providing ongoing guidance.

Investment advisers facilitate financial learning

A good human advisor takes the time to develop their clients’ financial education. As Dave Ramsey often says, your adviser should have “the heart of a teacher.” Robo-advisers do make investing easy, but they lack the human element of interaction that can develop their clients’ investment knowledge over time.

Clients that have human advisers involved in their financial education are at a distinct advantage. On-going, personalized human interactions provide important context to financial and investment plans. Human advisers also educate their clients in a way that builds the fortitude to stick with a plan in times of volatility. Robo-advisers certainly simplify the initial client interaction, but their clients are at risk of not learning and growing into the investors they need to become to reach their long-term goals.

Weathering the storm together

Human investment advisers relate to investors in ways that robo-advisers never will. When you want confidence and guidance in your investments, you want to talk to a real person that knows you and knows how to navigate the turbulent seas that are the financial markets.

Since its inception, Black Cypress has worked to serve exactly this purpose. In fact, the firm’s name comes from the Old Testament. Noah is instructed to build a large ship (ark) out of cypress wood coated with black tar, which will protect him and his family from an impending flood.

Our firm was started in the summer of 2009 after the most tumultuous recession since the Great Depression. Many investors were unprepared for the downturn and experienced significant losses. Like Noah and his ark, we wanted to build a vessel to protect our clients from the proverbial floods that drown individual investors. Thus, Black Cypress Capital Management was born.

If you would like more information about Black Cypress please contact us at [email protected] or 843-259-2009.

Article by Jordan M. Roberts, Black Cypress Capital

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Alan Hartley, CFA is Chief Investment Officer for Black Cypress. He has been in the investment field since 2004. Alan’s career started with a research associate position at Ergates Capital, a long/short hedge fund. Alan next joined Morningstar as a generalist equity analyst where he covered thirteen different industries and was promoted to the IPO team. Alan then managed $50 million in assets on the behalf of six different investment advisors. Alan launched Black Cypress in the midst of the 2008 and 2009 recession, with an account of $400,000. The firm now manages over $62 million. Alan is also an Investment Committee Board Member for the University of North Florida (UNF) Foundation Endowment. Alan writes articles for Morningstar, Seeking Alpha, and other syndicated publications. He graduated from UNF summa cum laude and received a B.B.A. in Finance. He has also earned the right to display the CFA designation. Alan lives with his wife and their dog in downtown Charleston, SC. He enjoys surfing, golfing, and hiking.

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