Can a Computer Replace Your Financial Advisor?

June 30, 2016

If driverless cars can replace your Uber driver, should a computer replace your financial advisor too? This isn’t just speculation. Automated investing services called “robo-advisors” are becoming more popular and even your 401(k) plan may offer an online investment advice program. Let’s start by taking a look at some areas that computers do well when it comes to personal finances:

Expense tracking. Many people use computer programs like Mint and Yodlee MoneyCenter to track their expenses. This can be very helpful if you don’t have the time or inclination to do it yourself.

Insurance needs. Since there can be a lot of variables, a computer program can be very helpful calculating how much insurance you need, especially with life insurance.

Debt payoff. Computers programs can also calculate how long it would take to pay off your debt and the effect of making additional payments.

Credit analysis and monitoring. Online programs like CreditKarma, Credit Sesame, and Quizzle can provide you with a free credit score, advice on improving it, and free credit monitoring.

Retirement and education funding projections. As long as the inputs and assumptions used in the calculation are reasonable, a computer program can do an excellent job here too. In fact, any human financial planner will probably NEED a computer program to calculate whether you’re saving enough for retirement or education expenses. Of course, there are a lot of unknowns but a good program can help you determine if you’re in the ballpark and allow you to measure your progress over time.

Asset allocation. Deciding how to optimize your investment mix is another task that financial planners typically use a computer for. It’s also the quintessential service provided by robo-advisors. The ability to customize your investments around not only your time frame but also your personal risk tolerance and possibly even to minimize your taxes and complement your other investments is one of the advantages of a robo-advisor over a more simple asset allocation fund.

Investment management. A robo-advisor can also add value to a portfolio by automatically rebalancing it periodically. Some robo-advisors even sell losing investments in a taxable account so you can use the losses to offset other taxes.

Simple tax preparation. Programs like TurboTax, TaxAct, and TaxCut are widely used for tax preparation. However, I would suggest using a professional tax preparer if you have a rental property or a business since there’s some judgment involved in knowing which category to classify various incomes and expenses.

Basic estate planning. If you just need basic estate planning documents like a simple will, a durable power of attorney, and an advance health care directive, you can use a computer to draft these documents and even store them online at little or no cost. If you have a more complex family or estate situation, you may want to hire an attorney to draft a trust though.

Account aggregation. Finally, if your financial life involves a lot of the above, you might want to use an account aggregation program to compile all the info in one place.

So what are computers NOT good at?

Getting you to use them in the first place. For example, our research shows that 76% of employees who are not on track for retirement haven’t even run a retirement calculator at all. The fanciest workout equipment won’t do you any good if you don’t actually use them. A financial planner can be like the personal trainer that gets you to go to the gym.

Motivating you to take action after the calculation. Many people run a retirement calculator but then never actually increase their savings enough to get on track. Some programs use a gamification model that can turn action steps into a game, but they aren’t always effective. A good financial planner can both get you to the gym and make sure you actually do the workouts.

Stopping you from sabotaging yourself. How many of us are tempted to overspend on something we don’t need, to make a risky bet with money we can’t afford to lose, or to bail out of our investments during a temporary downturn in the market? Just like a personal trainer can keep us from breaking our diet or over-training to the point of injury, stopping you from making costly mistakes is one of the most important functions of a financial planner. Even the most sophisticated investors can benefit from at least having a second opinion to bounce ideas off of.

This doesn’t necessarily mean that everyone needs a financial planner. You do need to be honest with yourself though. How disciplined and motivated are you when it comes to your personal finances? If you just need the right information to make decisions, a computer can certainly provide that. If you need more, you might need an actual human being.