Robots Vs. Human Advisors

Here is a good question to ponder: If an investor chooses a “traditional” robo-advisor, what price could they end up paying?

While there are many benefits to some of the technology used in traditional robo-advice, the fact remains that the oversight and management they provide is a poor substitute for the abilities of a human to manage a diversified investment portfolio.

Investors have a choice today that they did not have just a decade ago. They can seek investing and retirement planning guidance from a human financial advisor or put their invested assets in the hands of a traditional robo-advisor – a software program that maintains their portfolio.

Why would an investor want to leave all that decision making up to a computer? In this era of cybercrime and “flash crashes” on Wall Street, doesn’t that seem a little chancy?

No, not to the financial firms touting traditional robo-advice. They are wooing millennials, in particular. Some traditional robo-advisor accounts offer very low minimums and fees, and younger investors who want to “set it and forget it” or have their asset allocations gradually adjusted with time represent the prime market. In the 12 months between July 2014 and July 2015 alone, invested assets under management by traditional robo-advisors more than doubled.

Even so, only 5% of investors responding to a recent Wells Fargo/Gallup survey said they had used a traditional robo-advisor, and fewer than half those polled even knew what a robo-advisor was.

A cost-conscious investor may ask, “What’s so bad about using a traditional robo-advisor?” After all, taxpayers and tax preparers use tax prep software to fill out 1040 forms each year, and that seems to work well. Why shouldn’t investors rely on investment software?

The problem is the lack of a human element. The main reason why these investments are so cheap is because there is little to no oversight.  At eNVESTOLOGY, oversight over the various investments is being reviewed to make sure they should remain in your portfolio.  Each investment that we include will be carefully evaluated and regularly reviewed as to their benefit within your portfolio.  Additionally, as we all know, the investment environment changes over time and why shouldn’t your portfolio do the same.  Allocations that worked in the past may not work now or in the future.  The human element allows us at eNVESTOLOGY to take advantage of the information available and adjust portfolio allocations accordingly.

The closer you get to retirement age, the less appealing a traditional robo-advisor becomes. The software they use can’t yet perform sophisticated retirement planning – and after 50, people have financial concerns far beyond investment yields. Investment management does not equal retirement planning, estate planning, or risk management.  However, if you should need help with retirement, estate, financial or tax planning, we will gladly help you out.

Additionally, traditional robo-advisors have never faced a bear market. They first appeared in 2010. Passive investment management is one of their hallmarks. How well will their algorithms respond and rebalance a portfolio when the bears come out? That has yet to be seen. More importantly, do they have any predictive skills to align the underlying investments with an outlook that matches the future investment landscape?

Does a traditional robo-advisor have a fiduciary duty? Many investment and retirement planning professionals assume a fiduciary role for their clients. They have an ethical and legal duty to provide advice that is in the client’s best interest. How many robo-advisors have developed the discernment to do this? We take seriously our role in the process and look to a “client-first” attitude at all stages of the relationship.

The traditional robo-advisor “revolution” may be fleeting. Why, exactly? The whole traditional robo-advisor business model may invite the demise of many of these firms. Traditional robo-advisors pride themselves on low account fees, but as CNBC reports, those fees are now so minimal that many traditional robo-advisors are having a hard time making back their client acquisition costs. Ultimately, traditional robo-advisors may be remembered for the way they stimulated the financial services giants to offer low-minimum, low-cost investment tools.

In fact, hybrid platforms have also emerged. Some robos now offer investors the chance to talk to a real, live financial advisor as well as actual financial planning services when an account balance surpasses a certain threshold. At the same time, some of the major brokerages have introduced traditional robo-advisor investment platforms with potential human interaction to compete with the upstart investment firms that challenged their old-school approach.

It appears the “old fashioned” approach of working with a human financial advisor may be hard to disrupt. The opportunity to draw on experience, to have a relationship with a professional who has seen his or her clients go through the whole arc of retirement, is so essential. This is exactly what eNVESTOLOGY was designed to do. It bridges the gap between the robot and the professional advisor. Essentially leveraging technology for the benefit of both the client and the advisor.

Some investors will never talk to a financial advisor in their lives. Just why is that? TIAA (formerly TIAA-CREF) surveyed 2,000 adults online and found some answers. Of those who hadn’t consulted financial advisors: 55% feared it would be too expensive, and 49% said it was “hard to know which sources or whom I can trust.” Forty percent were unsure of what questions to ask a financial professional, and 38% said that it would be awkward discussing their finances with someone else.

These responses point to uncertainty about the process of financial and retirement planning. The process is really quite worthwhile, quite illuminating, and quite helpful. It is not just about planning to improve “the numbers,” it is also about planning ways to sustain and improve your quality of life.