What can advisors learn from the rise of robo-advice?

Conventional wisdom might say the role of a human financial advisor is under threat from the growth of automated services, or robo-advice, but this couldn’t be further from the truth according to Vanguard’s latest research around the value of advice. 

Our findings suggest the rise of robo-advice presents a significant opportunity for advisors to strengthen their businesses if they can leverage technology and align their services with investor preferences, with the ultimate aim of delivering greater value in the eyes of clients.

 

By Christophe Collet, CFA
Senior Sales Executive, Vanguard Investments Switzerland GmbH

 

Throughout history, automation has disrupted markets, including labour markets – in some cases making certain roles entirely redundant. For advisors, though, automation could mean liberation to focus on adding more value for clients. That’s the ultimate message from Vanguard’s latest research around the perceived value of advice and different delivery methods.

We surveyed more than 1,500 US investors with either a human or robo advisor to quantify investors’ views on the value of the services. The findings paint a varied picture of client preferences with useful insights for advisors keen to optimise their value-add for clients and ultimately strengthen and grow their business.

Most notably, we found that 88% of robo-advised investors would be willing or extremely willing to switch to a human advisor in future, while 93% of human-advised investors would stick with human delivery. This indicates significant business-development opportunities for human advisors.

We’ve distilled the main findings into five key takeaways for advisors:

 

1. Advice adds value across the board.

Regardless of the delivery method, investors believe that advice provides higher incremental portfolio value than going it alone.

As the chart below illustrates, individuals working with human advisors estimated that on an annualised basis, they achieved a 15% average return with the help of their adviser compared with only a 10% return if they had been unadvised, making a perceived value-add to annual performance of 5 percentage points (pp). Those with robo-only advice reported perceived average portfolio returns of 24% service against only 21% if they did not use a digital advisor, meaning a perceived value-add to annual performance of 3 pp.

Fig. 1 - Investors believe human and digital advisors provide substantial portfolio value


Source: Vanguard and Escalent, 2021.

Notes: Respondents were asked, 'In your experience with your human (or digital) adviser, what would you estimate your average annual investment returns to be in the past three years? If you have not had an adviser for three years, think about the relationship you have had with your adviser thus far.'

 

2. Investors prefer human advice for emotional support.

Our research also found that investors prefer human rather than automated delivery for the ‘emotional’ elements of financial-planning services. To quantify perceived emotional value, we asked investors about the financial peace of mind they receive from their advisor. First, we asked whether investors had peace of mind knowing that their human or robo advisor was looking after their investments, with peace of mind defined as ‘a positive feeling of knowing that your investments are on track’.

We then asked investors whether they would have peace of mind if they were managing their investments on their own. As the next chart shows, while both sets of investors gained significant peace of mind with their chosen delivery of service, only 24% of human-advised clients believe they would have peace of mind managing their own investments, compared with 59% of robo-advised investors.

Fig. 2


 

 

 

 

 

 

 

Source: Vanguard and Escalent, 2021.

Notes: The survey was conducted in July 2021. The sample includes all who responded to the question, for a total of 1,308 human-advised and 337 robo-advised clients. Investors could rate peace of mind from 0 (“no peace of mind at all”) to 10 (“a great deal of peace of mind”). Clients were considered to have a peace of mind if their rating was between 8 and 10.

 

3. Satisfaction is high in the industry.

The survey found that 84% of human-advised clients and 77% of robo-advised clients are satisfied with the advice they are receiving. The high levels of satisfaction further underlines the perceived value of advice for investors, while the gap between stated satisfaction for human- and robo-advised clients reinforces the notion that there is an opportunity for advisors to attract robo-advised investors.

 

4. Demographics are not important when considering relative preferences.

Contrary to popular belief, the survey did not find that millennials have distinct preferences that differ from other generations when it comes to automation of service.

We compared the preferences of respondents by age group, including ‘millennial’, ‘generation X’ and ‘baby boomer’ and found their responses to be highly correlated. In short, younger and older investors rank similarly regarding which services they prefer to be automated or delivered by a human[1].

 

5. Automation can liberate advisors to focus on higher value tasks

Overall, the research indicates investors prefer emotional and financial-planning services to be delivered by an advisor and portfolio services and functional tasks to be automated. We think this presents an opportunity for advisors who want to optimise their value-add for existing and potential clients.

For those advisors, automation means freedom to focus more on the activities that drive the business and increased profitability. More often than not, those activities are the things that strengthen client relationships and contribute to the emotional value that clients value highly.

Ultimately, advisors should align their resources to most appropriately fit the business tasks where investors perceive they provide the greatest value.

Fig. 3

Source: Vanguard.

Read the full report for greater detail around which tasks and services investors tend to prefer to be delivered by a human or robo advisor.

 

Biography

Christophe Collet, CFA is Senior Sales Executive and has responsibility for the French- and Italian-speaking regions. He joined Vanguard in 2018 as a senior ETF sales specialist for Switzerland, France, Belgium and Luxembourg and was until recently deputy head of ETF sales specialists for Europe. Prior to joining Vanguard, he spent five years at BlackRock, covering wealth intermediary clients in French-speaking Switzerland as part of the ETF and index solutions department. Christophe also held various roles at Amundi, where he contributed to new product launches and equity swap structuring within the ETF product development team.

Christophe earned a Master of Sciences (MSc.) in Finance from Rouen Business School, and took part in the international exchange programme of Singapore Management University. He is also a CFA Charterholder and a member of the Swiss CFA Society.

 

[1] Source: Vanguard and Escalent, 2021.

Notes: All 1,518 clients answered the question in which they were presented with four micro-interactions at a time, 12 times in different screens, and asked which they most preferred to be delivered by a human or digital service so that we could rank each micro-interaction as well as relative preferences by age group, including ‘millennial’, ‘gen X’ and ‘baby boomer’. The statistical technique used to calculate the rank and relative performance scores is called MaxDiff.