Automation and the transition to digital solutions are affecting more and more industries, and financial services are no exception.

Over the past few years, tech-savvy consumers increasingly have embraced financial-technology investment tools to save time and money in managing their investment portfolios. 

Robo-advisers, which provide around-the-clock digital financial planning services based on mathematical models and algorithms, are a particularly popular choice. To access the services of a robo-adviser, a user completes an online questionnaire about his or her financial situation, goals and appetite for risk, and the software then creates a customized portfolio for that investor, with automated rebalancing.

Those services generally use low-cost investment vehicles, such as exchange-traded funds, in a passive form of investment that doesn’t require humans to pick winners and losers or attempt to time the market. 

Investors are always counseled against making decisions based on emotions, such as panicking and selling when the market drops. So, featuring purely data-driven transactions can be an attractive option.

That said, we all know the world is complex, and as sophisticated as many of these tools are, they can’t take all potential variables in an investor’s own personal big-picture financial situation—or even the larger political and economic landscape—into account.

Though they don’t yet have a long track record to analyze, robo-advisers and similar financial technology tools undoubtedly are useful for young investors who have limited funds to invest and no complex financial issues to address—and who perhaps don’t feel settled enough to establish a relationship with a financial adviser or wealth manager. But do these tools provide a broadly adequate approach to investment? 

Typically, registered investment advisers and wealth managers have a fiduciary duty to their clients, meaning they’re legally and ethically required to act in the best interests of their clients rather than for their own profit. Interestingly, most robo-advisers actually are registered investment advisers and thus can be considered fiduciaries, but the standard of care to which they are held remains the subject of debate within the industry.

Robo-advisers don’t sell proprietary products so they avoid even the appearance of conflicts of interest, and their algorithms are designed to create automatically the most appropriate portfolio for a given investor. In that sense, they are operating in their clients’ interests rather than their own.

The choices robo-advisers make, though, are generally based on a limited amount of information generated by responses to a standardized questionnaire, which is unlikely to provide a complete picture of an investor’s overall financial situation, family obligations, and long-term objectives.

Machines cannot really know their customers well enough to ensure that they’re providing the best possible advice. And their advice is also of limited scope, unlike the services of an actual human adviser, who can provide investment counsel within the context of tax planning, estate planning, and cash-flow considerations, for example.

Perhaps unsurprisingly, as the robo-advising industry matures, companies are recognizing this shortcoming, and many are adding an option to speak with a real human via phone or online chat. However, that relatively limited access is no replacement for the close relationships cultivated by wealth managers. 

How does a human adviser look out for his or her clients’ best interests at all times? A real fiduciary should take the following actions:

•Employ a disciplined and diversified approach to investing and asset management. A wealth manager should formulate a client’s risk profile and investment framework based on the individual’s or family’s overall financial and tax situation, and then stick to the identified strategy. It’s easy to do well investing during a bull market, but it’s much more difficult to achieve the same success over the long term. A disciplined approach and a carefully crafted portfolio—which likely will include investment vehicles beyond those available to robo-advisers—are critical.

•Monitor and respond to financial and tax-related legislation at both the state and federal level. A wealth manager should keep a watchful eye on new developments and be nimble and ready to adjust strategies when necessary. However, he or she should also be confident and restrained enough to stay the course during times of uncertainty. 

•Integrate financial planning and estate planning for increased effectiveness. Good estate planning and gifting strategies can maximize tax efficiency and ensure that an investor’s legacy is passed on in the manner he or she intended. Wealth managers also can help investors meet their broader goals by developing a clear understanding of their clients’ philanthropic priorities and helping them pursue these objectives in the most tax-efficient manner, resulting in more value for the chosen beneficiaries.

•Educate the next generation. Individuals who inherit wealth are, unfortunately, not always capable of using it wisely. A good wealth manager will help the members of the family’s younger generation understand the implications of their spending and investment choices and will work with them to help them make sound decisions that will further their own life goals.

As the saying goes, “Don’t confuse brains with a bull market.”

In today’s investing environment, it’s easy to win, but the good times won’t last forever. Hot picks, gut instincts, and even algorithms might not stand up to a bear market.

The market will inevitably turn, and that’s when the expertise of a trusted financial adviser will prove its value.

There’s no substitute for experience, a solid understanding of the big picture, and the ability to craft personalized plans beyond choosing technically suitable investment vehicles.

Alicia O’Mary is the Wealth Management & Advisory Services team leader for Washington Trust Bank’s
Spokane region. She has more than 14 years of trust administration and estate planning experience and also is an attorney.