The proliferation of robo advisors, or automated online investment platforms, bringing low priced financial services out into the market, has received significant buzz over the past few years. As is prudent with anyone who provides professional financial services, it has raised a lot of questions, both from your clients and from ourselves. In fact, we have been considering whether robo advise would at some point factor into our portfolio of services. So, as is customary, we educate ourselves.
The robo advisors’ value proposition is simple: allow investors to open investment accounts online and provide a substantially lower fee schedule than a typical financial advisor. This new phenomenon could be a good option for both younger investors and experienced do-it yourselfers. The investors have to be comfortable with delegating their investment strategy to a computer algorithm, in exchange for lower fees.
However, turning to a robo advisor isn’t necessarily a good strategy for everyone. Nothing can replace the value of receiving sound professional advice, guidance and monitoring from an educated, reputable and experienced financial advisor. For those who are looking for an asset allocation and a low-cost entry into investing, robo advice can be a great place to start. Far too many new investors go through the day trading dogma before realizing that the losers far outstrip the winners and that the adrenaline rush is a short-lived trip to less wealth and non-strategic market obsession.
But as we continue, we arrive at: “minimal human intervention.” When it comes to managing your money, minimal human intervention can be good or bad. The good comes when the algorithms and mathematical rules produce an asset allocation that is sensible for the purpose for which it is intended. The good also comes when the “human advisor” interjects personal preferences and judgments that are in the clients’ best interest.
Now, let’s analyze the downside. How we consider money, use money, value money, and what we believe about money is very human, indeed, and cannot be solved by mathematical equations. The navigation of our very humanness demands a different blueprint than one produced by answering a questionnaire that produces a computer-generated solution.
Before you decide on an option for financial advice, consider the following:
- When it comes to your financial life, what’s most important at this stage of life?
- What are the financial complexities that you currently face?
- What is your the level of financial knowledge pertaining to personal financial planning?
- How do you test your decision-making for appropriateness?
If your situation is simple, basic and you are just beginning, the robo option could be a good option for you. However, if there are complexities in your financial life (e.g. debt, children, employee benefits, risk management issues, estate and tax issues, cash flow management) perhaps a better option is to work with a financial life planner who can walk your through your situation and customize a plan that is yours and yours alone.
Can You Trust a Robo Advisor?
I’ve worked around computers for the past 35 years and the quick answer to the question above is maybe. Computers are only as good as the people who program and support them. Computers can break down, have bugs, and they react in the manner in which they are programmed. In other words, like financial advisors, computers are not infallible and only time will tell if a computer program has done the right job for investors.
One Size Fits All
At the account opening stage, a robo advisor program will ask the investor a hand-full of questions in an effort to determine an investment strategy and risk tolerance. Once this process is complete, the computer selects one of several pre-set investment portfolios. The investor is then slotted toward a particular suitable portfolio. This simplicity of account management allows the robo advisor to keep its expenses low and lean, but it will not necessarily provide an investment strategy that is unique to the investor’s personal needs.
Can a Robo Advisor Understand an Investor?
A computer cannot take a holistic financial life planning approach to determine future needs and wishes. Computers cannot understand the level of tax efficiency a person may need for their specific investment or insurance needs, retirement goals or anticipate the proper distribution of estate assets. Robo advisors are primarily geared toward creating and monitoring investment portfolios, and cannot necessarily take into account all of the variables that apply to individual investors.
The Importance of Financial Life Planning
Some of the robo advisor systems offer various financial planning tools and calculators. Conversely, a great financial advisor will insist on developing a comprehensive financial life plan for each new client. Unlike computer programs, financial advisors will delve into a much more thorough discussion at the account opening stage to understand and uncover all of the necessary information that will become part of the client’s long-term financial life plan. While the investment strategy of a financial plan is extremely important, it is just one of several components that make up a comprehensive financial life plan. Robo advisors have many more limitations when it comes to comprehensive planning.
Judged on Plan, Not Market Values
Robo advisors will live and die by market values, whereas a great financial advisor will monitor comprehensive financial life plans on a regular basis. A variety of components are of primary concern to a financial advisor, such as; tax efficiency, insurance needs, retirement needs, distribution of estate, etc. Therefore, fluctuating market values are a secondary byproduct of their financial life planning process. During stock market volatility, many investors turn to their advisors for guidance. It is very difficult to speak to a computer for advice on an investment portfolio, so many robo advisor services provide a call centre where the investor can call in order to receive a limited amount of advice. Remember, its not the investor’s advisor, its one in a call queue.
The Bottom Line
Robo advisors are a new reality and will compete for assets. They will quickly gain popularity among both young and seasoned investors. Financial advisors that cannot easily demonstrate a comprehensive value proposition will suffer under these new competitive pressures.
On the flip side, the majority of investors benefit from various levels of financial life planning strategies through their life stages. Financial advisors that offer comprehensive financial life planning will continue to prosper as investors will pay for added value received, but they may have to “sharpen their pencils” to deal with these new-age competitors. Alternatively, they may decide to align themselves with a robo advisor service in order to cover all bases and provide a unique offering to the do-it-yourselfers.
That’s the tactic that we are pursuing to add the option to our portfolio of services. We are always looking forward as our industry, and the needs of our clients, evolve. All part of Keeping Life Current.
