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My tools • February 12, 2020

Robo-advisor or human advisor?

The pros and cons of personal finance chatbots

Are you familiar with chatbots? These virtual assistants are becoming increasingly prevalent in our digital environment. Created using artificial intelligence and sometimes represented by an avatar, these assistants are integrated into an instant messaging service to answer questions or perform various actions.1 It is now common to get instant support in such sectors as e-commerce, insurance and health. Personal finances are no exception. But what is a robo-advisor? It’s an online platform managed by a portfolio manager. Investors fill out a questionnaire that assesses their risk tolerance and guides the passive management approach implemented by the bot.2 The first ever robo-advisor was launched in 2010 and seemed to target younger generations comfortable with new technologies.3

Robo-advisor pros

The most obvious benefits are the instant response and ease of use. Also, robo-advisors or online advisors have low investment thresholds and management fees.4 These factors explain the increasing share of assets managed by these online platforms: in the first three quarters of 2019, a real growth occurred as these assets increased by 10% to a total of $283 billion ($B) in the third quarter of 2019.5

And cons

Robo-advisors generally do not provide customized or specific financial advice for particular needs. For example, they won’t be able to recommend investing in your RRSP or TFSA, monitor your portfolio, or help you plan going back to school or your retirement.6 That is also the case for estate planning and taxation. The bots don’t know what your particular situation is or what your specific financial goals are if they change over time. The analysis is limited to the questionnaire you fill out when opening your account. These online platforms also sometimes offer limited investment types.7

Another drawback is that the conversation is essentially conducted on a rational basis through automated digital communication. Hence this warning from the Autorité des marchés financiers: “If markets are down and you are worried, you will not be able to meet with a professional who will reassure you and help you make a decision.”8 You can chat live, but it’s no replacement for the relationship you would have with your own financial advisor.9 A face-to-face meeting with your advisor, not a bot that makes you think it’s clever, will always provide you with nuance and an understanding of your needs, as well as help you with your financial health.

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