By Brandon Simon
Robots are taking over! Ok, robots may not actually be taking over just yet. However, in a world where jobs are increasingly being taken by our automated companions, your financial intermediary may be next.
In my Facebook Investing Club a poster appeared which insinuated that robo-advisers are the way of the future of investing. On its face, I figured this to be blasphemous. It is a human’s job to manage money, not some machine! Meanwhile, investors, particularly younger investors, are turning towards robo-advisers, which are low-cost online wealth-management services that use algorithms to place investors into various portfolios based on their risk tolerance and other factors. Sometimes, such services use questionnaires to gauge risk tolerance. As of late 2016, financial research firm Cerulli Associates estimates total assets on digital-advice platforms were $71.5 billion.
A big part of choosing a financial professional is the trust and confidence that this person will take good care of you and your money. Could trusting a computer with your investments be too much? Your life savings? Your life’s work? Interestingly, perhaps the biggest advantage of robo-advising is the lack of the “human element.” Financial professionals will often see patterns where none exist and overlook important information, something that robo-advisors are ostensibly immune to. So while you might not be able to call your robo-adviser, your robo-adviser will not make decisions for you based on a gut feeling, partially because robo-advisers lack a “gut.”
Further, the populous has become more cognizant of expenses. The difference can lie in the fee: where some human advisors may charge between 1%-2%, a robo-adviser fee may range from .25%-.5%. However, to view a flat annual fee as the only cost of doing business would be shortsighted. While robo-advising may be economical in the short-run, it may not be fitting for investors with complex estates, business, or tax circumstances that may benefit from the human touch of a traditional financial advisor. While robo-advisers can maintain client portfolios, traditional human advisers still win on willingness to take the time to understand the investors’ needs and goals, look at the investors’ entire financial picture, and explain analysis clearly to the investors. Investors hold these to be the most important qualities they are looking for in financial services.
The low cost of a robo-adviser allows us to invoke the proverb, “You get what you pay for.” Indeed, some robo-advisers simply ask a few questions about the investor’s profile and then put the investor into what the robo-adviser deems “suitable.” This could lead to a plague of regulatory issues regarding suitability as well as issues dealing with a fiduciary duty.
Regardless of how you may view the pros and cons of hiring a robo-adviser, always be sure to do your own research and make an informed decision.