Robo-Advisers: Weighing the value of automated advice



Is a robot advisor right for you? The answer to this question comes down to your unique needs, complexities, and personal preferences.

What is a robot advisor? The answer is between the lines

You can Google “robo-adviser” and find thousands of definitions. Simply put, they’re a cost-effective solution that falls between managing your own investments and hiring a full-service wealth management company to manage your entire financial situation. The hierarchy looks like this:

  1. DIY investment
  2. Robot advisors
  3. Full-service wealth manager

Need a little more clarification? LegalZoom can serve as a useful analogy. Their online templates may cost more than writing a legal document yourself, but they’ll save you time and likely produce a better deliverable. LegalZoom is also cheaper than using a full-service law firm, but their easy-to-modify templates may not be enough if the complexity of your legal situation requires a specialist lawyer. The legal services hierarchy would look like this:

  1. Do-it-yourself legal work (DIY)
  2. LegalZoom
  3. Professional lawyer

The same can be said of robo-advisers. A full-service wealth manager can be worth every penny if you have complex needs or if you’d rather just spend your precious time doing something else. If not, most robo-advisers seem to be priced well for the mid-range investment services they offer.

What will a Robo-Adviser do for you?

Services vary, but in general a robot advisor should:

  • Collect basic information, such as your financial goals, risk tolerance, and timeline.
  • Use its proprietary algorithm to recommend a model investment portfolio to you.
  • Treat yourself to an online platform to fund your account via a money transfer, an initial deposit and / or recurring deposits.
  • Allocate your assets in the model portfolio you selected.
  • Manage your model-based portfolio in the future, including periodic rebalancing.

Some robo-advisers also offer online financial planning and budgeting, as well as access to a human advisor, usually at an additional cost. As robo-advisors continue to evolve, the lines may blur between their roles as “robot” and “advisor,” but their personalized interactions – or pricing – are unlikely to approach the same. levels you would expect from a dedicated advisor.

That being said, Alex Lynch, CFA, Wealth Advisor at Jarvis Financial, believes that robo-counselors could eventually prove to be a good solution to improving financial literacy and education in America.

“About 67% of Americans not have a written financial plan. If robo-advisers can continue to evolve beyond providing generic advice on investment allocation, they could really make a difference and help more households access financial planning services at an acceptable cost ” , explains Alex.

New name, old idea

Whichever definition we give them, robot advisers have increased in recent times. Today, there are almost 100 in 15 countries, and they are growing steadily. Some are new companies like Wealthfront and Betterment, whose founders were leaders in popularizing the robo-advisor model. Others are household names that have jumped on the bandwagon, such as Schwab Intelligent Portfolios, Fidelity Go®, and Vanguard Personal Adviser Services.

By the way, robot advisers aren’t as new as you might think. While the term only took off around 2012, it made at least one early appearance almost 20 years ago, in a Financial planning article titled “Robo-Adviser: In a New World of Intense 401 (k) Anxiety Caused by the Enron Fiasco, the Only Hand Investors May Have to Hold May Be Digital.”

In addition, I would say that the robo-advisor concept has been around even longer – since The Vanguard Wellington fund was born in 1928. This American balanced mutual fund offered investors turnkey access to a unique, diversified and inexpensive portfolio of stocks and bonds, governed by a prospectus prescribing its investment strategy and target risk levels.

This is essentially what a robo-advisor also offers: turnkey access to low-cost automated investments using a rules-based approach. In this context, there is nothing radically new in the financial industry that offers different levels of more economical / cookie-cutter investment solutions compared to more expensive / tailor-made investment solutions.

Variations on the Robo-Adviser theme

Which brings me to my next point: you don’t always need to transfer all of your money to a robo-advisor to get a mid-priced, mid-service solution for automated investment management services. Most large mutual fund companies offer low cost balanced mutual funds that automatically manage your money based on your goal and level of risk. For example, a low cost target date fund would meet this criterion.

There are a few caveats: A traditional balanced fund cannot be built from scratch using the latest technology, generously funded by venture capital. They are not always as diverse as their name suggests. And not all are cheap.

That said, robot advisers often present their own challenges as well.

  • Administrative obstacles: We have seen evidence that it is easier to join a robo-adviser platform than to leave it. Some of them insist on writing a physical check instead of facilitating wire transfers when you go. And at least one well-known robo-advisor, financial advisers have encountered problems transferring critical information on a cost basis.
  • Future unknowns: The robo-consulting industry is also relatively new and competitive, with independent companies launched, merged, acquired by bigger players, and made public in the blink of an eye. In other words, the platform you start with may not be the platform you stay on over time.
  • Opaque costs: Last but not least, some robo-advisers advertise incredibly low prices. They can then clear seemingly “free” trades by using proprietary funds with higher underlying expense ratios, or by demanding large cash positions, so they can profit from behind-the-scenes lending strategies. Suffice it to say that when a price seems too good to be true, it probably is, and at least well-known robo-advisor accused of breaching his fiduciary duty because of some of these actions.

That’s not to say that a robo-advisor might not yet be a good deal and a good “middle ground” solution for you. But you’ll want to dig deeper to find out. And remember, Robot Advisors aren’t the only mid-range game in town. No matter what you are considering, shop around and read the fine print. It might even be worth consulting with an independent financial planner for a second opinion before proceeding.

Are you ready to robotize?

So when is a robo-adviser or a similar solution that suits you? Assuming you generally get what you pay for, robo-advisers are useful when you want your investments to be managed efficiently and profitably. In fact, they can be called more precisely robo-managers. Their strong point is investment management when your top priority is making and saving money, and your financial and tax planning needs are relatively straightforward.

A good robotics advisor can also help self-employed investors avoid falling into the common financial behavioral traps that trap them so often. Plus, they can free you up more time to pursue your real interests, instead of worrying about your portfolio or worrying about the daily movements of the financial markets.

The value of a financial planner

For the simple and profitable purposes just described, robo-advisers are often priced appropriately. If, however, you want or need high-quality human interaction and one-on-one advice, you might want more than a robo-advisor has to give. They can be overly automated when years of accumulated wealth can benefit from much more nuanced management.

For example, a larger investment portfolio with larger positions and embedded taxable earnings may need to be handled with care as part of a diversified portfolio, rather than automatically traded by an algorithm. Plus, as you approach and get closer to retirement, you are likely to have planning needs that go beyond just saving and investing. These can include creating a tax-efficient income stream; coordinate insurance, estate planning and charitable objectives; and more.

Over time, you may also appreciate more and more having a dedicated advisor to facilitate and hold you accountable for your financial goals. Even if you turn to a robot-advisor / planner pair, they won’t always measure up to real financial advice. How complete or personalized can a person be if you are one of the 1,000 assigned clients?

A great sign that maybe it’s time for more personalized advice is when you start asking yourself more complex questions about your money, like:

  • What should I do with my stock options?
  • Can I retire in 10 years, rent my house and travel the world?
  • How can I reduce my tax bill?

You know these are important questions, you don’t have the answers and you wouldn’t mind hiring someone to help you solve them. Especially if your accumulated wealth has started keeping you awake at night instead of helping you sleep more soundly, it’s probably time to de-automate your planning.

Founder and CEO, Define Financial

Taylor Schulte, CFP®, is founder and CEO of Define financial, a fee-only wealth management company in San Diego. In addition, Schulte hosts The Stay Rich on Retirement podcast, teach people how to lower taxes, invest smarter, and make work optional. He was recognized as one of the Top 40 Advisors Under 40 by InvestmentNews and one of the Top 100 Most Influential Advisors by Investopedia.


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