What do you know about robo-advisors?
As a fiduciary financial advisor for over 30 years, when it comes to robos, I naturally have some strong opinions. (Which should surprise absolutely no one.)
A quick backstory: If I had to choose the single biggest reason that I became a financial advisor, it’s because of an experience I had at my first job.
Like a lot of young college grads with business degrees, I accepted a position with a large company (an insurance giant).
Though my title was “advisor,” it was more of a sales position, and while I certainly learned a lot about communication, it was not a pleasant experience, overall.
Maybe you’ve been there yourself.
A room full of enthusiastic recent college graduates starting new jobs at a firm where the overarching goal is to sell that company’s products.
I didn’t last very long.
The single aspect of that job that I disliked most was how impersonal it was.
Sales quotas. Cold calling. Even conflicts of interest. People weren’t long-term clients - they were one-time customers.
But that’s pretty much how the “advisory” sector was at that time. RIAs fiduciary advising, and holistic, comprehensive financial planning weren’t well known or widespread back then.
Robo-advisors are a class of advisor that use algorithms to manage investments.
So, generally, is it a good thing?
The irony is, that as the co-founder of an advisory firm, I obviously have my own conflict of interest here.
But I’ll attempt to be bipartisan.
For folks who have just begun saving and investing, have relatively simple portfolios (say, modest amounts of cash to invest), and who are a good many years away from transitioning into retirement, getting set-up with a robo-advisor has some upside.
For one, it’s relatively easy and fast. In fact, virtually 100% of working with a robo-advisor can be accomplished via an app on your phone. And because there’s so little personalization and fewer service offerings, it’s also generally (though not always) cheaper than working with a traditional advisor.
For a certain type of investor, at a certain point in their career, a robo-advisor is a legitimate option. (And almost anything that gets a young person saving for, and thinking about, the future is a good thing.)
But what are some of the drawbacks of working with robos?
My first objection is a lack of personalization.
I’m referring to the fact that with robo-advisors, you typically have a narrow, non-personalized menu of investment options, which usually includes only a limited number of Exchange Traded Funds (ETFs).
Sometimes less is more. Other times… not. But a limited menu makes investment diversification more difficult.
The next big drawback has to do with face-to-face meetings. And this especially impacts, not only investing, but investor decision making.
And that’s a big deal.
Anecdotally, it would be impossible to count the number of times that I’ve sat next to a client – someone I may have met with many times – and we worked and worked until we finally got to the core of what they wanted to achieve financially, both in the short term and during retirement.
And only then were we able to build an investment approach and financial plan in support of achieving those goals.
And that just does not happen without a decent amount of interaction and financial introspection.
Personalization.
Because the fact is that when my clients retire well? Or when a client passes away and their loved ones come to fully understand how much thought went into protecting their interests? Or when the market slides and a worried client wants to move everything to cash (and lock in their losses)?
Again, personalization.
Friendships. Relationships. Consistent communication. Being able to reach me and pick my brain. Identifying goals. Duration until retirement. The preferences of investing. Podcasts. Meeting with the children of clients. Financial education. Workshops. And, perhaps most important of all, dispensing dispassionate guidance that helps to eliminate behavioral finance from the planning process.
Software can’t help you and your family account for the emotions that surround money, nor can it diagnose or address any oversights or personal financial issues you may be having.
Robos can’t explain what steps you should take to improve your financial situation, nor even help you address debt or plan for major purchases.
The fact is that robos are adequate at the 10% of your financial life that is investment management. But they are not as good at the other 90%, which, for starters, includes the short and long-term financial decision-making process, the goal setting, the budgeting, the money saving and forward-thinking tax planning, and even the estate planning recommendations that we all need to consider.
Also, robos can actually hurt clients because they rebalance portfolios too often. And, lastly, while one of the big selling points of robos is that they generally charge less than a dedicated, human, fiduciary advisor, even that isn’t always the case.
People often say that your financial advisor is one of the most important business relationships you will ever have.
And while certainly, the dollars and cents advantages of working with a dedicated advisor are something you can measure, the advantages of the personalization of what we do, and frankly, of what helping clients achieve their goals means to them, and to us, is something that can’t be quantified or replaced by an app.