Is a robo advisor right for me?
Well, as with most things in the world of personal finance and investing, it depends on your personal facts and circumstances. But a good place to start is to look at some of the pros and cons of robotic advisers and financial advisers.
Usually, robot advisers, who use an algorithm to manage your investments, charge a much lower fee to manage your assets than a human advisor. Additionally, robotics advisers tend to have no account minimum or account minimum.
Additionally, many robot advisors, including those offered by Charles Schwab, Vanguard and Betterment, now offer access to a living and breathing financial advisor, according to Scott Smith, director of advisor relations at Cerulli Associates. “I think we’ve long underestimated the usefulness of human advisers,” Smith said.
Another advantage is that more and more financial advisers are adding robotic advisory services to their offerings. “Digital advice is here to stay,” said Tony Davidow, author of a soon to be published book, “Goal-Based Investing: A Visionary Framework for Wealth Management”. “These automated solutions can provide scalability and efficiency to wealth management companies and the advisors who adopt them. They offer a more efficient way to manage small accounts.
The disadvantages of robo advisers
One of the downsides of using a robot advisor is that your investments are managed by a computer. And it’s a black box. Yes, a human created the entries for the computer to use. But, in general, you won’t have a clue of these inputs – capital market expectations, rebalancing triggers, assumed inflation rate, etc. – and how your portfolio is ultimately managed.
Robo advisers have other limitations as well. “Wallets and plans are a lot more complicated and important than what you buy from Amazon or Apple,” Smith said. “As pure investment tools, digital-only platforms are a slight upgrade from target date funds.”
Another downside is that robot advisers don’t work well in isolation, Davidow said. “I think investors always benefit from human intervention, especially during times of turmoil, COVID-19, for example. “
Who should use a robo advisor?
If you don’t have a lot of assets and your finances aren’t complicated, hiring a robo-advisor may be a good idea for your investments. “Digital advice can be a great way to engage younger investors who are well versed in financial techniques and services,” Davidow said. “The discipline provided in these robot offerings keeps investors focused on the long term and keeps them out of the emotional traps of so many investors,” he said.
Smith also said that purely digital consulting platforms make sense for those who feel comfortable and confident without human assistance.
If you choose to use a robot advisor, consider using one that provides access to a financial advisor. “A hybrid solution combining automated advice and some level of human engagement is the best approach,” said Davidow.
Unfortunately, the hybrid approach works on paper not so much in reality, Smith said.
“By combining powerful aggregation and analytics technology with the delivery of human advice, providers have the ability to create a truly differentiated customer experience,” he said. “However, finding a balance between the sophistication of the analytics and the simplicity of the user experience remains an elusive goal at the enterprise level. A wide range of clients want comprehensive, personalized advice, but financial planning data collection and discovery processes remain largely resistant to scale. “
The advantages of a financial advisor
Financial advisers, at least the good ones, have a lot to offer investors. Most, if not all, financial advisors will review all of your finances and accounts before creating an investment plan, which they will implement, monitor, and adjust over time.
Plus, they’ll look at the tax consequences associated with all investment accounts and investments, and in times of turbulence, they’re likely to keep you from sabotaging your plan. “Wealth counselors can also serve as a behavioral coach in times of turbulence,” Davidow said. “Robots lack the ability to identify non-verbal cues and help investors overcome their behavioral biases.”
The best financial advisers ultimately provide objective advice and personalized service. “A robotic solution is not suitable for high net worth investors with complex financial needs,” Davidow. “High-quality personalized advice cannot be trivialized.
The disadvantages of a financial advisor
One of the downsides of using a financial advisor can be the fees. On average, a financial advisor will charge you 1% of the assets they manage for you – per year. In addition, there is often a minimum account which in some cases can be as high as $ 1 million or more. And then there is the question of competence, quality and trust. Not all advisors are created equal. Some are better than others. Some will act as trustees and some will not. Most will appear trustworthy, but some are not. And, in the end, trying to identify the good from the less good can be difficult.
Who to call a financial advisor?
If your assets are large and your finances are complicated, hiring a traditional financial advisor is a good idea. “Wealth advisors add the most value by meeting the needs of high net worth investors in complex circumstances,” said Davidow. “Wealth advisers often have advanced training in handling complex wealth management issues such as executive compensation, trusts and estates, tax management, and concentrated asset management, among others. “
Smith shares this opinion. “Digital platforms have created millions of customer relationships, but for an investor with complicated finances, the burden of having to collect the equivalent of a year’s worth of paper statements has simply turned into the equally difficult task of remember all usernames and full aggregation, ”he said.