Is a Robo Advisor in Your Financial Future?

All of the do-it-yourself investment sites that have come on the market within the past 25 years, have left brokers and financial advisors clawing for new business and changing the way they approach prospects. Online trading sites like Scottrade, TD Ameritrade, Charles Schwab and Vanguard are now providing advice, resources, and the means for opening retirement accounts within minutes giving individual investors control of investment decisions. Now a more technologically advanced investment decision maker, the Robo Advisor, looks at all possible risk-reward outcomes to create a custom-designed portfolio, is gaining popularity. But is a robo advisor in your financial future?

Digital Investors

Simply put, a robo-advisor is a method to automate the asset allocation of investments via a computer algorithm. A recent Wall Street Journal article reported that between July 2014 and July 2015, invested assets under management by robo advisors more than doubled. Part of the reason investors are turning to robo advisors are the fees. An investor using a human adviser might pay an annual fee of 1% to 2% of assets versus a robo adviser fee of 0.25% to 0.50%, saving the investor tens of thousands of dollars per year. This is a particular wise solution for the new investor with a small nest egg saving for retirement. For the wealthy, robo advisors offer a convenience that isn’t available from human advisors, that has essentially pit computers against financial planners.

A recent report by MyPrivateBanking Research, found that 43% of the 600 affluent and wealthy investors surveyed in the US and the UK have adopted the use of digital wealth advice. Additionally, more than 70% of overall respondents think that robo advising tools can positively influence their wealth manager’s advice and speed up the registration and account opening processes, adding efficiency and convenience.  

So are robo advisors here to stay? “Yes,” says Tim Clifford, a Certified Financial Planner and Managing Partner and Investment Consultant at Core Wealth Consultants LLC. “Robo advisors are here to stay. In fact they’ve been here a lot longer than most investors realize. Portfolios have been built and managed via computer programs for over 20 years, so this is not really that new. What is new is that now the technology is available to the average investor.” Traditional financial advisors such as PaineWebber had the same tools available as early as the mid-90s, using them to create personalized asset allocation plans for clients.

Some of the robo advisors popular today include Betterment, WealthBar Financial Services,  Nest Wealth Asset Management, and Wealth Simple Black. Almost all offer personalized financial planning and tax strategies, and lower fees for clients who invest more than $100,000. Many of the new ones are wooing millennials, in particular attracting younger investors with very low minimums and fees, touting the “set it and forget it” no hassle investment approach. Although this particular generation is attracted to the non-human financial advisor model, investors at all stages of life appreciate when a financial professional takes time to understand their story and their financial goals, which an automated algorithmic-based investment advice can’t do.

Many banking and financial institutions are already using some form of automation or machine learning to save customers time and money, for example Standard Bank utilized WorkFusion’s SPA software to automate their customer onboarding process. With bots integrated into so many processes already, it’s only logical that customer will start to trust them with everything, including managing their money.

To Go Or Not Go Robo

The problem, for both the investor and the financial planner, is the lack of a human element. Obviously, many financial planners would prefer to handle the client’s investment needs rather than the client putting their trust in a digital service. For one, there are the fees that planners could potentially make, but there is also the one-on-one service planners feel their clients need. For advocates of a software program maintaining their portfolio, there is the belief, and sometimes rightly so, that human advisors often steer their clients toward products that are in their own best financial interest and not that of their clients. But on the flip side, robo advisers may not necessarily eliminate this type of conflict. Humans set up these digital services so there is the potential for someone to design portfolios or algorithms in ways that systematically maximize the robo advisors revenue at the expense of their clients’ best interests.

In addition, robo advisors have never really faced a bear market. Coming on the scene in 2010, these digital investing services look really good on the surface when the market has been favorable to the investor. “The investor, up until recently, has just been one element removed from this type of service,” says Clifford. “Robo advisors make it more transparent and cost effective, which is a good thing.” But robo advising isn’t for every situation. Investors with business or complex estate tax circumstances may benefit more from the advice of a human financial adviser. But for the majority of investors, robo advising offers advantages that can translate into better returns than the typical human adviser can deliver.

A recent Forbes article states that new hybrid robo platforms have come on the scene, (Betterment is one), offering investors the chance to talk to a live financial advisor and financial planning services when an account balance surpasses a certain threshold. Though some robo advisors remain fully automated, there are others that offer the option to speak with an investment professional for advice via phone or online chat. Some are customized for young, inexperienced investors while others are geared toward experienced ones with larger wealth bases. Vanguard Personal Advisory Services and LearnVest are just two of the human assisted robo advisors available today.

“A robo advisor is a good product for high net worth clients,” states Clifford. “However, I believe it is good for only a portion of their investments. And in a best case scenario, using a robo adviser in conjunction with a real person can be very effective both in terms of quality and costs.”