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Robot Advisor or Human Advisor

Robo-Advisors are attracting more attention today. Even some large Wirehouse Firms and Independent Financial Advisors are adding them to their list of services.

In simple terms, a robo-advisor is a computer algorithm program created by humans to manage money digitally in a cost effective manner. Essentially they replace wealth managers with a lower cost computer model trading your money with a hands-off approach.

An investor fills out a questionnaire to create a proper risk/reward asset allocation model typically based upon Modern Portfolio theory. The computer generates the allocation and funds the account with Traditional Mutual Funds or Exchange Traded Funds (ETFs).

Adding a Human Element

Many still want human contact as well and some wealth managers are adding that service to the computer program trading. Known as the hybrid approach, this provides an investor access to an advisor for help during the process.

So What’s the Problem

There may not be a problem. Robo-Advisors may be a simple investing method. However, I just don’t feel planning for your financial future is a simple process. Wealth management is just part of comprehensive financial planning. That’s where the real human element needs to come into play.

Every investor is incredibly unique. There are so many other questions to be answered in the financial planning process beyond a risk assessment questionnaire. Financial planners should have a fiduciary responsibility to always act in the best interest of their clients and this means knowing the client’s unique situation.

To truly act in someone’s best interest, questions beyond a basic 10-15 risk profile will need to be asked. These questions will be regarding assets, liabilities, expenses, risk avoidance, risk transference, estate planning, asset protection, income planning, retirement planning, taxes and insurances just for starters.

A financial advisor should be asking questions that surface emotions, dreams, desires, obstacles, problems and potential solutions. A robo-advisor only asks standard questions that allow for standard answers. It will never feel the emotional response or question if the answer is complete and honest.

Cheap or Expensive

The proposed new DOL rule would require Financial Advisors to justify their value proposition based upon what they charge on a fee basis. There must be inherent value for what is paid – a financial planner’s fee for wealth management services must be in line with the value provided. This leads to a great question – am I getting adequate value for what I am paying my advisor? Value can be measured in leadership, returns, relationship, contact, being treated like a person, regular reviews, proper reporting and additional services to provide clarity. Other important factors one should consider are:

  • Understanding what you own and why you own it
  • The wealth manager’s buy and sell disciplines
  • The investment policies of the wealth manager
  • Absolute fee transparency – avoid unnecessary transaction costs – one disclosed fee should cover the management
  • Avoid unnecessary Open End Mutual Fund expenses

If you don’t feel you are receiving value then why pay for it? In this case utilizing a lower cost route, such as a robo-advisor, may seem like the solution. However, please recognize robo-advisors utilize Mutual Funds and may charge transaction (buy and sell) fees. There are a number of platforms out there so be aware of what you are paying for.

Perhaps a better alternative would be to find a financial advisor that gave you the value, the service and the comprehensive planning necessary to create the financial future you desire at a cost you feel worthy.

Use Caution

There is no standard approach to investing and wealth management should truly be a custom plan for the individual. Most would suggest you never put all your eggs in one basket and I believe this would definitely apply to robo- trading. It is not a get rich quick method any more than managed trading. There are no secret algorithms that only the robo-trader knows.

For those that are going the do it yourself method of investing ‘no matter what’, robo-trading may help remove emotion from your investing. But there are a few things to keep in mind.

  • Don’t lie to yourself or to the questionnaire
  • There is no one size fits all product
  • Never invest more than your budget will comfortably allow
  • Consider seeking professional advice about other aspects of your financial plan

In summary, there are pros and cons to any investment portfolio and there is never a perfect investment strategy. Robo-Advisor platforms could make sense for part of your investment strategy. But please remember a successful investment portfolio is based upon a humanized element (the advisor and client relationship) tailored to unique values, goals and dreams. No two investors are alike and most would greatly benefit from personalized leadership and clarity through unbiased financial counsel.

This is not intended to give specific legal, tax or investment advice. Advisory Services offered through Nepsis Advisor Services, Inc.; An SEC Registered Investment Advisor.
Read “The Real Cost of Poor Financial Planning”

Rick Torrington

Rick Torrington, CFP® has been offering sound comprehensive financial, retirement, asset protection and wealth management advice to his clients in Sarasota and most of Florida for close to 20 years. He is diligent in his efforts to provide clarity and financial knowledge to the public through his articles and ebooks.