by Ron Surz
To answer this question, it’s important to realize that investment consulting encompasses two distinct crafts: (1) the development of advice and guidance and (2) the delivery of that advice and guidance. The 2nd craft is relationship management, a uniquely human skill that has evolved very nicely over the past 40 years, creating today’s “trusted advisor.” In the contest between Robo financial advisors and Human advisors, Human wins the relationship management contest because Robos aren’t playing.
Robo financial advisors disdain this human craft, opting instead to focus on the first craft, that of developing advice and guidance. So the question is whether Robos are better than Humans at the craft of developing advice. The unfortunate reality is that both could be better, so neither is a clear winner. No one ever questions the rigor and efficacy of investment advisor analyses, but they should.
Unlike the craft of relationship management, the craft of advice and guidance remains in the Dark Ages even though the front end of that craft, namely data collection, is better now than it has ever been. Robos are masters at collecting data, so they have an edge, but data is not information & it is certainly not knowledge. Analysis of that data has not evolved much in the past 40 years, even though it is processed at lightning speed in this digital era.
There are better analytical tools but they remain on the shelf. Human financial advisors use the old analytical tools too, although not as adeptly as Robos. It’s like using a scalpel instead of a laser for corrective eye surgery.
The craft of advice and guidance addresses two critical investment decisions: asset allocation (amounts in stocks, bonds, etc.) and manager selection. The old tool for asset allocation is Modern Portfolio Theory (MPT) which is now 60 years old. In the meantime, more advanced and accurate approaches have emerged, including the following:
- Dr Frank Sortino’s Post Modern Portfolio Theory views risk as the possibility of failing to achieve objectives, rather than standard deviation used in MPT
- Dr. Robert Haugen turned the risk-reward paradigm on its ear, showing that low risk stocks perform better than high risk.
As for the craft of manager selection, Robos abandon this craft altogether, opting instead to use all passive allocations, so you could say that this contest goes to the Humans. But human advisors fail to choose outperforming managers because successful manager due diligence requires more time, energy and expertise than most are willing to commit. The old tools of indexes and peer groups do not work – never have, never will. See Hiring a Portfolio Manager is like Hiring a Professional Gambler for a description of contemporary manager due diligence that works.
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