Can AI replace the 6 core roles of a Human Financial Advisor?

As technology advances, many are wondering if AI could eventually replace human financial advisors. Robo-advisors like Wealthfront and Betterment have made great strides in automated investment management, providing low-cost, algorithm-driven financial advice.

However, their capabilities are always limited when it comes to providing an overview of your financial situation and providing individual guidance.

The true value of human financial advisors goes beyond basic investment management. Consultants act as coaches and mentors, asking the right questions to provide comprehensive recommendations covering advanced tax strategies, estate planning and more.

This article explores six key roles for human financial advisors that AI has yet to fully fulfill.

Comprehensive Portfolio Tracking

Robo-advisors specialize in managing and tracking liquid investments, such as stocks, bonds and ETFs. They use algorithms to automate asset allocation, regularly rebalance portfolios, and optimize tax efficiency within these liquid assets.

However, they are usually not responsible for the total wealth of a person, such as a lien on real estate, private investments, or other non-liquid assets.

Personal advisors can take into account all types of assets, providing a holistic view of your financial situation. They can include liquid assets in their planning and recommendations, offering a variety of financial advice that captures your overall financial life.

Investment Advice

This is where robo advisors really make their mark. They provide automated investment advice based on your risk tolerance, investment goals and time horizon. They improve asset allocation, offer low-cost investment products like ETFs and index funds, and are independent.

However, their advice is usually limited to the assets they manage and does not have the ability to provide advice for unique personal situations or changing market conditions.

Human advisors provide “real investment advice” that goes beyond just percentage allocations. They consider changes in your life, market fluctuations, and other external influences. In addition, human advisors provide emotional support during market fluctuations, helping you manage your responses and maintain a long-term perspective.

Tax Reform

Robo-advisors offer other tax optimization features, usually tax loss harvesting. This includes selling independently at a loss to reduce profits and reduce taxable income. These independent systems are effective in identifying tax savings opportunities within the investment area they manage.

However, the tax optimization offered by robo-advisors is usually limited to basic strategies and within the limits of the assets they oversee. They don’t actually offer a personalized tax plan that takes into account your financial situation or tax situation.

Robo-advisors can miss opportunities that arise from business owners, changes in income levels, or other tax situations.

Personal financial advisors engage in detailed, iterative conversations with clients to uncover specific tax savings opportunities.

For example, finding out that a client is self-employed may lead an advisor to recommend forming an S Corp, allowing the client to take profits as a distribution instead of regular income, thus saving on taxes. They can also work with tax attorneys for more complex situations.

Personal advisors also provide tailored advice on how to withdraw funds from retirement accounts in a tax-efficient manner, manage taxable events in an orderly manner, and use various tax-advantaged accounts. and discounts.

Position Design

Robo Advisors provides tools for basic contingency planning, helping clients assess their retirement needs and plan for the future. However, these tools tend to rely on fixed models and predefined tools, which lack the ability to adapt to dynamic and complex financial situations.

Human consultants provide clear, structured scenario planning, considering a wide range of future scenarios. They work closely with clients to adjust plans as circumstances change, offering different recommendations for different things, such as market downturns or significant life events. This level of personalized planning gives you peace of mind and a clear strategy for solving life’s problems.

Housing Design

Robo-advisors provide basic estate planning tools, especially guidance on naming beneficiaries and possibly simple wills or trusts. However, their capabilities are limited and may not solve your financial and family problems.

Personal advisors work closely with clients and legal professionals to draft detailed wills, trusts, and other legal documents tailored to a client’s specific needs. They deal with complex family situations and legal issues, ensuring that all assets are accounted for and protected according to your wishes.

For example, a personal advisor may recommend setting up a trust to protect your child’s inheritance from an unfaithful spouse or to ensure that a special needs guardian is provided without jeopardizing his or her eligibility for of government benefits. These recommendations often come from deep, one-on-one conversations where family dynamics and personal choices are discussed.

Advice and Training

Robo-advisors are designed to manage investments and optimize portfolios based on algorithms, but they lack the human input necessary for effective mentoring and coaching.

Investment decisions are often driven by emotions, and consumers often need encouragement and guidance to stay active during volatile markets or financial crises.

Human counselors excel at this, offering compassion and advice beyond numbers. They build relationships with their customers, gaining a deeper understanding of their financial behavior, fears and aspirations. This allows human advisors to provide tailored advice and emotional support, helping you make informed decisions and avoiding common pitfalls driven by fear or greed.

For example, during a market downturn, a robo-advisor may suggest holding a course based on historical data, but a human advisor may provide context, sharing experiences from the past the past, and gave emotional encouragement. This human connection can prevent buyers from making rash decisions such as selling assets during a market downturn.

Will AI Ever Replace These Human Consultant Jobs?

Alex Harmsen, founder of AI-powered investment advisor Portfolio Pilot, believes it is possible. His company focuses on investment information and advice but is currently working to expand into more advanced financial services such as tax planning, estate planning and estate planning.

“Eighty or ninety percent of the foundation is already there. So adding these other features feels like a huge unlock and makes the whole experience more powerful, more integrated, more useful,” he says.

However, Harmsen knows they have a lot of work ahead of them. For example, in order to make people trust the investment advice that his platform provides, they provide strong explanations for the advice that they provide. They are also working on an AI assistant that can extract some of this valuable information needed to provide general financial advice.

There’s no doubt that big robo-advisors like Wealthfront and Betterment are working on similar solutions, and Alex is very confident that the technology is already there and only getting better.

However, as of now, AI cannot replace the diverse, comprehensive, and personalized advice that financial advisors provide.

Final Thoughts

While AI and robo-advisors have revolutionized some aspects of financial management, especially investment advice, the core competencies of human financial advisors remain in demand.

Personal advisors specialize in understanding the unique financial situation of clients, providing personalized advice, developing complex tax strategies, and clear planning for the future. Their ability to provide empathetic advice and build trust sets them apart from robo-advisors and AI-powered tools.

However, this is not a zero-sum game. Advisers that take a hybrid approach, expanding AI functionality in other areas and combining it with human touch, may be more beneficial to clients.