Why AI Can’t Replace Human Financial Advisors

In the 1990s, the internet changed the nature of the financial advice industry. Now a few decades later, artificial intelligence is changing it again.

Brent Beardsley is the head of advisor solutions at Vanguard, which began working directly with advisors a quarter of a century ago. Since then, investors have gained access to the same investment information as the pros. With modern investment platforms, they can choose funds and see portfolio details on their own.

Where do financial advisors fit into today’s industry landscape?

Brent joins the Big Picture in Practice podcast to talk about what advisors can do to add value for clients—and what activities they can outsource. He believes advisors offer uniquely human connections that technology can enhance but won’t replace.

“We work with advisors on all these incredible value-added opportunities that didn’t exist 25 years ago,” he says.

Here are the main takeaways from the conversation.

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Twenty-five years ago, investors might have measured “advisor alpha” by their ability to outperform the market after expenses and fees, Brent explains. But today the market looks different. With exchange-traded funds, investors have more access to low-cost index-tracking investments that aim to replicate market performance.

Today, investors look to advisors for value-add activities beyond stock-picking.

“With a zero-sum view of investing, someone wins and someone else loses,” Brent explains. “But there are all these positive things you can do as an advisor—financial planning, behavioral coaching—where everybody does better.”

The modern advisor focuses more on human-to-human relationships, Brent says. By spending less time on portfolio management tasks, advisors can focus on personal outreach . That helps investors stay on track to their goals and helps advisory practices keep clients for the long term.

Clients often have thorny questions about personal finance issues that go beyond a mutual fund pick.

Through personal relationships that span years, advisors get to know what matters to clients at a level that enriches portfolio decisions. They can sit down with clients for deeper discussions about their priorities, goals, and money mindset.

Advisors can expand their services—and client perception of their value—with a broader set of personalized advice on topics like:

• Saving for healthcare expenses. How much should a client put away, and what account should they put it in?
• Roth IRA conversions. How can clients manage tax burdens and required minimum distributions in retirement?
• Retirement income. What savings accounts should a client withdraw from first? How much can they safely spend in a year?

New tools can help with many aspects of financial planning. Advisors can run through a questionnaire and use tools to assess risk tolerance, review goals, and initiate the portfolio construction process. Brent’s team at Vanguard also offers portfolio consultation to help advisors accomplish client needs.

But advisors can also delve into personal conversations to uncover realities that algorithms might miss. For example, many clients in the sandwich generation will have to care for their aging parents as well as their children. That’s a difficult conversation to have—adult children with healthy parents might understandably struggle with the idea of their parents’ future declining health.

Technology isn’t equipped to handle those tough, nuanced conversations, Brent says. In these situations, financial advisors truly shine.

Pundits can be quick to blame investors for what they perceive as irrational behavior—for meme stock trends or panic selloffs in market downturns.

But Brent says that investor behavior might not be so irrational after all. In other areas of our lives, it works out well when we make decisions based on historical data. When we choose what university to attend, or what car to buy, we can look at reviews and make a reasonable decision about what to expect going forward.

No wonder investors might hesitate to sell a stock when it’s on a run, or to sell high and buy low.

The problem, he says, is that natural reaction doesn’t work when applied to investments, where historical returns are no guarantee of future ones. Brent sees this as an opportunity for advisors to coach investors and help them make the right decisions long-term.

Behavioral coaching especially comes into play during retirement, when investors have to switch from accumulating assets to spending down their savings. Brent says he’s seen many advisors who struggle with clients resisting the shift.

Advisors can help clients stay the course and make data-based decisions for the long term, even when the markets move off course.

“New technology has transformed what advisors do on a day-to-day basis and how they interact with clients,” Brent says. With new tools, advisors can automate tasks and free up resources for other aspects of their practice.

Advisors can fully outsource workflows like portfolio construction and fund selection to focus on what matters to clients. By the end of 2023, model portfolios had expanded to nearly $424 billion in cumulative assets under management.

Vanguard offers model portfolios that suit a range of client goals and risk tolerances. The team helps advisors spend more time on client meetings and engagement.

With a direct-indexing approach, clients own the underlying investments of an index instead of a share of an index fund. The tactic creates more opportunities for personalization that used to be prohibitively manual and time-consuming.

“Technology has broken the compromise between something at scale and commoditized versus something personalized and unique,” Brent says.

Direct indexing comes with potential tax-loss harvesting opportunities through automated and tax management. It also supports personalized portfolio adjustments for factors like career concentration risk or sustainability preferences.

The direct-indexing approach works best when it complements with guardrails. Investors don’t want to move too far from an investment strategy’s objectives or target allocations with the adjustments.

“Personalized indexing allows you to quickly set the parameters for portfolio construction,” Brent says. “Then you can incorporate those parameters into a personalized experience that reflects your values without compromising your investment returns.”

While technology can automate or assist many of the routine aspects of the advisor’s job, Brent says advisors shouldn’t see it as a threat to their practice. He believes that the evolution of the finance advice industry to date has all been in service of investor success.

“There’s so much about human-to-human connections that technology can’t replace,” Brent says.

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