The proliferation of Robo-Advisors bringing low priced financial services out into the market has received significant buzz over the past few years. As is customary with all new things, one must ask questions before buying into it. As a Certified Financial Planner, my question is: Does Robo Advice have true value to the average consumer? My answer: A definitive “maybe.”
The road to good advice lies in a tangle of issues that can easily sway the answer from a strong “avoid at all costs” to “yes, there’s value there.”
According to Wikipedia, “Robo-advisors are a class of financial advisers that provide financial advice or portfolio management online with minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms.”
Let’s examine the premise. With Robo-advisors, Financial Advice or portfolio management is provided at a low cost, typically requiring low minimum investments. So far, sounds like an attractive deal for consumers.
But as we continue, we arrive at: “minimal human intervention.” When it comes to managing your money, minimal human intervention can be good or bad. The good comes when the algorithms and mathematical rules produce an asset allocation that is sensible for the purpose for which it is intended. The good also comes when the “human advisor” interjects personal preferences and judgments that are in the clients’ best interest.
Now, let’s analyze the downside, which can be a very deep and chasm. How we consider money, how we use money, how we value money, and what we believe about money is very human, indeed, and cannot be solved by mathematical equations. The navigation of our very humanness demands a different blueprint than one produced by answering a questionnaire that produces a computer-generated solution.
Consider this anecdote:
Monica’s father died when she was seven. Her mother struggled to support the family without the lost earnings. Monica believed that money represented a very precious commodity that is difficult to come by and even harder to hold on to. The scars from her childhood followed her into adulthood; even into her life as a successful attorney. Monica was a classic worrier and a hoarder of capital. She had trouble trusting that she had sufficient savings and wealth to live comfortably. The result was a steady stream of deposits into cash accounts.
Monica heard about a Robo Advisor who could help guide her financial decisions. After uploading her questionnaire, she was left with an investment plan that included a wide range of ETF’s and Index Fund investments. The plan sat without action as the advice did not connect with Monica’s thinking, experience and beliefs around money and her experience.
In this case, while the allocation provided might have been stone-cold excellent, without helping Monica in a very human way—a very understanding way—there was little chance of success.
For those who are looking for an asset allocation and a low-cost entry into investing, Robo advice can be a great place to start. Far too many new “investors” go through the stock-picking/option-writing/penny stock phase before realizing that the losers far outstrip the winners and that the adrenaline rush is a short-lived trip to less wealth and non-strategic market obsession.
Before you decide on an option for financial advice, consider the following:
- When it comes to your financial life, what is most important at this stage of your life?
- What are the financial complexities that you currently face?
- What is the level of financial knowledge pertaining specifically to personal financial planning topics?
- How do you test your decision-making for appropriateness?
If your situation is simple, basic and you are just beginning, the Robo option could be a good option for you. However, if there are complexities in your financial life (debt, children, employee benefits, risk management issues, estate and tax issues, cash flow management, etc) perhaps a better option is to work with a planner who can walk you through your situation and customize a plan that is yours and yours alone.
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