The financial crisis of 2007-2008 decimated consumer trust in financial markets and institutions. Not only did private investors lose $8 trillion in net worth, but they also had to pay $376 billion in fees. Many investors lost confidence in the idea of using financial advisers to help with investment decisions. As a result, they've opted to go it alone.
But most people are not prepared or simply don't have the time to actively and successfully manage their portfolios. This fact is part of the impetus behind the robo-adviser movement. Automated investment offerings take away a lot of the guesswork, empowering investors at lower cost than traditional routes. Robo-advisers have done an excellent job of bringing new investors to the table. But despite touting strong performance and ease-of-use for consumers, they may not be the savior to market instability.
Robo-advisers are like the WebMD of investing — good for basic information but if you have a potentially serious condition or are dealing with a complex situation, you need to talk to a professional. Otherwise, you won't find an exact match for your symptoms. Robo-advisers are designed to make investing work for the masses, not for an individual's specific circumstances.
Additionally, robo-advisers have never been tested in a bear market. How do they react when the market takes a hit? While robo-advisers can do a lot for young or novice investors, they can't give investors a place to turn for situational advice when things go a little sideways.
But really what it all boils down to at the most basic level is robo-advisers can't foster trust.
Trust is vital to the investment process because financial transactions are inherently personal. Even the best predictive models can't know exactly when someone's life changes, correctly assess the full impact of that change and effectively adjust one's investment strategy based on the change.
NO BOND, NO TRUST
You can't have trust without an emotional bond or the faith that someone or something knows you well enough to understand the difference between true priorities and gut reaction. Automation has come a long way, but there is still no way for a robo-adviser to fully account for that human element. And to move markets forward, there must be room to adjust (sometimes frequently) for the dynamics of life.
So instead of going full automation, what makes more sense is pairing technology that makes investing easier with a professional who has a vested interest in a person's day-to-day life and long-term goals. This is where digital adoption and social media can play a pivotal role. Through social networks and websites, investors can identify and vet human advisers; they can find financial advocates who share a similar philosophy, get to know a bit about them on a personal level and research them in a pretty thorough manner before ever picking up the phone or scheduling a meeting.
By taking a look at an adviser's digital and social presence, investors learn who advisers are connected to, what they prioritize, and what sets them apart as the person best equipped to manage their finances. In this sense, social media profiles serve as an equalizer of sorts. It's no longer a “stranger” in control of an investor's future; it's Bob with three kids who joined the firm five years ago with a goal of helping millennials understand how to plot investment strategies for the short and long term, and all the surprises in between. The relationship between client and adviser becomes two-sided, establishing closer-to-equal footing than they've ever had before.
TRANSLATING RELATIONSHIPS IN TO DOLLARS
In terms of how social connections and improved relationships translate into dollars and cents, Putnam recently reported that
66% of individual advisers who use social media for business have added new clients through social interaction. These clients they are landing do not represent drops in the bucket. Thirty-nine percent have gained over $1 million in new assets, up from 29% who reported the same in 2013. The same Putnam study also found that 75% of financial advisers are using social media for business.
When it comes to the mass affluent, the numbers are even higher. In another survey, LinkedIn reported
near total adoption of social media. The study showed that almost two in five “use social media for discovery or consideration of financial companies, products, policies, or accounts (36%); among mass affluent who use social media for both purposes, nearly two in three (63%) take action as a result of what they learn.”
There is still room for growth, but as these numbers continue to increase, as advisers provide timely, value-added, personalized service, bonds will strengthen between advisers and clients in unprecedented ways. Trust will be re-established. Social media is essential in this transformation, and as it happens, expect a major uptick in participation in financial markets.
Victor Gaxiola is the customer advocacy manager at Hearsay Social.
