I have decided to focus my blog this month on the topic of “Robo Advisors”. The term is starting to get thrown around more and more and I think many investors are confused as to what this exactly means. Also, technology is rapidly changing, so Robo Advisors are evolving quickly.
Currently, most Robo Advisor’s are simply computer run models running Asset Allocation software typically picking low cost index or exchange traded funds (ETF) and charging a small, recurring quarterly fee. They advertise a ‘low cost’ solution and their ads are typically targeted to younger investors. I’ve noticed that they all seem to say that ‘low cost’ is better and you shouldn’t pay more for investment advice. However, if ‘low cost’ was all that truly mattered, then we would all be driving Kia’s and living in small houses wearing clothes from the thrift shop… I would argue that cost is not the only consideration and if you have a larger amount of investable assets, then this argument gets stronger.
When I work with a new client, I create a financial plan and have them go through budgets and spreadsheets and pages of data. I do this so I can create an accurate projection of their financial situation. I even run probability modeling software that illustrates different rates of return, inflation rates, and cash flows. Then I analyze the ‘what-if’s’ of life and review life, disability, and long term care insurance. I also review a clients legacy plan (or help create one) and tax returns. I do all of this because I want to make sure that my clients are protected and have the income they need, no matter what life throws at them. When I present a financial plan and my client implements it, they know the following:
They have the income they need in retirement and know exactly where it is going to come from. The income will be from diversified sources that might consist of stocks, bonds, mutual funds, ETF’s, real estate, and guaranteed income products
If something bad were to happen, such as death, disability, or nursing home, they know their loved ones are protected and have a plan in place
They have a legacy plan to give assets to their children and/or charities upon their death
By comparison, you would be lucky if the Robo Advisor had a tool that showed you a calculator where you can input your income and then it assumes you live from 80% of your income in retirement. A Robo Advisor also cannot sell insurance or guaranteed income products. A Robo Advisor can’t research and perhaps get you involved in Private Equity or Partnership transactions that might benefit a higher net worth person. A Robo Advisor won’t review your estate plan and meet with your attorney to suggest changes. A Robo Advisor won’t review your tax return and provide investment advice targeted to your tax situation. All a Robo Advisor does is build a computer controlled investment portfolio and charge a fee.
So there you have it. If all you want is a computer model to manage your money and only offer you a small sampling of what the investing world can offer, then the Robo Advisor might be for you. As I have hopefully illustrated, Robo Advisors are targeted and meant for small investors or investors starting out. Once you hit about $500,000 in assets (which is my investment minimum), then that is where someone like me can step in and provide much, much more. This is also why I really don’t worry about ever being replaced by a robot in the future.
On a final note, a robot doesn’t care what happens to your money. It does what it does. By comparison, 90% of my income is tied to my clients account balances. If my clients increase their assets, then I make more. If their assets decrease, then I make less. So which would you prefer? A robotic computer program or someone who’s mortgage payment and kid’s college fund depends upon doing right by his clients?