Today you can have your investments managed by a Robo adviser or, an automated (or semi-automated) system that manages your money for you. After completing one or more online questionnaires, most Robo systems will set up your investment account and invest your portfolio according to your goals. But is that enough once you have significant assets and a more complex financial situation?
In the last few years, a new type of financial services company has emerged, the fintech company. These companies are trying to use technology to automate, simplify and improve investing. One fintech outgrowth is the Robo adviser. Using a series of questionnaires and AI (artificial intelligence), Robo adviser services design investment plans tailored to individual investor goals. The services are intended to simplify the investing process, and save you time and money, especially if you are just starting out.
Helping small investors get started
As someone who has worked with individual investors for more then 35 years, Robo advisers can be just what a beginning investor may need -- help with creating a good, basic investment and savings program that is well-diversified and matching the investor’s risk and return needs. In this country there is a shortage of good quality investment advice especially for those with less than $250,000 to invest. Robo advice is one of the newest solutions attempting to address this problem.
Low minimums, low fees, limited human service
The first few Robo advisory firms were upstarts such as Wealthfront and Betterment. Now, the big boys, such as Merrill Lynch, Morgan Stanley, Fidelity and Vanguard, all have developed their own Robo advisory services. Most services have low ($3,000 or less) or no minimum initial investment amount to get started. A separate management fee is charged to manage your account which is in addition to any expenses charged by the investments in the program.
There’s no such thing as a free lunch
Investors should note that most Robos receive revenue from other sources including the investment companies on their platform, brokerage firms, affiliates, and others. These other sources of revenue may influence or limit that types of investments that are available to you in the Robo program. What does this mean? It could mean that you are not getting the absolute best or lowest cost investment product. So, be careful and read all of the fine print before signing up.
Robo advisers can be good for:
- Those who are just starting out with their careers / beginner investors
- Those with simple finances and tax situations
- Those who are comfortable with online tools, and messaging or calling a toll-free number for customer service
Robo advisers can be not so good for
- Those going through a major life change or with unique financial circumstances
- Those with multiple financial goals
- Those with complex needs and tax situations
- Those who need help separating their emotions from a financial decision or event
- Those who want to work with an experienced Certified Financial Planner™ practitioner who knows their financial and life situation well
Limited services: Determine how much advice you need first
While Robo advisory services are designed for limited human contact, many offer access to Certified Financial Planner™ practitioners. I don’t claim to know any of these CFP® practitioners, but I do know that our clients are making big financial decisions based on our experience and advice. Having worked in the call centers of several major financial firms early in my career, I can tell you that the person on the other end of the chat box or toll-free number is likely trained but not very experienced, especially in making major, real life financial decisions. Those highly experienced individuals mainly are found in private practice like ours. If you don’t need that depth of experience, a Robo adviser may be sufficient for your needs.
Would you rather talk to Alexa or a human when the [@$! hits the fan?
Have you asked Amazon’s Alexa for investment advice yet? (Don’t worry, its coming.) It is powered by artificial intelligence. As you may know Alexa can answer basic questions. But try asking something complex and you’ll usually get, “I don’t know but I found this article on the web” for an answer. If the market drops by 1,000 points, you should think about how comfortable you’ll be with a Robo adviser. Currently Alexa can’t provide you with specific investment advice for your personal situation, but eventually she’s going to have an answer for you.
The human touch
A human advisor can be especially helpful in managing your emotions around financial decisions. We’re not getting all ‘touchy, feely’ here. The reality is that one’s finances are very personal and there are a lot of emotions tied up in them. When a personal crisis hits, such as the death of a loved one or an external crisis hits such as the COVID-19 pandemic, a human adviser can be the cool, calm, third-party that is focused on your unique financial goals. Just knowing that you should ‘invest for the long term’ is rarely enough during a financial crisis. An experienced, independent, and fee-only adviser can provide you with a steady and objective perspective through good and bad times.
If you have more questions about Robo advisers, give us a call. We’re here to help.
Lyman H. Jackson
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.