Is Robo Advising Right For Me?
July 02, 2014There’s been a lot of buzz recently on the idea of investors using robo-advisors to manage their investment portfolios rather than human advisors. If you are not familiar with the term, a “robo-advisor” is an online financial advisory service that uses a basic investment philosophy to create software programs that can manage a person’s investment portfolio automatically. The argument for using this type of approach rather than a human advisor goes something like this: if an investment portfolio using fundamental investment strategies can be implemented automatically with a computer, then why pay for human involvement?
What are the benefits?
As the argument suggests, using a robo-advisor may be a less expensive alternative to using a human financial advisor. If all things are equal, less expensive would be preferable to more expensive. Also, robo-advisors offer a disciplined investment strategy that does not react emotionally to changes in the stock market or economy so investors are not as likely to make changes to their investment portfolios as they might be if they managed them on their own.
What does it lack?
For many investors, lower fees and a disciplined investment strategy is just what they need. But just because investors should not make investment decisions based on emotions, doesn’t mean that they won’t have any. Robo-advisors cannot replace the human touch.
Remember 2008? The stock market fell nearly 40% and investors were nervous. Sure, a robo-advisor would assist in keeping the investor’s asset allocation consistent but would the robo-advisor be able to take a phone call from an investor that is in a panic because their 401(k) plan is down $200k? Or what about the concerns of a parent over their child’s future education?
I recall a client years ago who had a daughter that wanted to go off to a fashion college after high school. The mother was concerned that the daughter would borrow a lot of money for an education that she did not think would be worth it. How would a robo-advisor address that?
A human financial advisor is able to help clients cope with their emotions and can work with them to develop a customized financial plan that goes beyond traditional investing services. While robo-advisors can take a lot of information into consideration when giving investment advice, it is unlikely that they can account for all of the nuances that go into more comprehensive financial planning. If you are interested in reading more on the differences between receiving advice from robo-advisors versus traditional financial advisors, check out Would you trust a robot to manage your money? or Robo-advice: Cheap, but is it good?.
How do I choose?
Ask yourself what you are looking for from your financial advisor. Are you looking for someone who can help you find the next Apple or someone who can help you understand the implications of current market conditions or someone who can help you put together an overarching plan for reaching your long-term financial goals? If so, a traditional financial advisor may be what you want (see How to Choose a Financial Planner). On the other hand, if what you are really looking for is simply ongoing advice on how to manage your investments, a robo-advisor may be your best option.