Why "Robo" Advisors Will NEVER Take The Place Of Human Advisors
There are two topics which get me fired up in financial planning and investing – people who take advantage of their clients, and those who claim to have the product to fix everything. When clients come to advisors looking for help, they are opening themselves up about a topic they may not have discussed with anyone before. The last thing they deserve in this time of vulnerability is to be taken advantage of with products and services that don’t solve their problem or are grossly over-priced. Then there are situations where advisors or financial professionals claim that their “thing” can be used in many ways to solve various problems. This could be an insurance policy or a legal document, but invariably it doesn’t do what it claims to do, and if gets close, it’s very expensive to the client. Neither approach is helpful to a client and often has them spending far more money than they should on products that don’t actually help them.
This is why I’m very transparent with my pricing (it’s front and center on my website) and I don’t sell any products of any kind. What you see is what you get.
How does this relate to robots?
One movement that’s been taking place over the last seven years is the concept of “robo-advising”. There have been a lot of technology start-ups that have based their ideas on “disrupting” investing by removing the advisor from the equation and having pre-built portfolios for investors to use which are then managed and tweaked by algorithms.
But things aren’t all rosy in start-up land. Out of the dozens of companies who have started doing this type of work, only three main players remain – the rest have been bought before they really got started or burned through their capital and closed. The remaining players are Betterment and Wealthfront, work directly with consumers, and Financial Engines who focuses primarily on 401(k) plans. For the most part, these companies have been attracting consumers to their service, but it comes at the expense of raising HUGE amounts of money in order to stay in business for the long term. With Betterment, they have had to raise over $200,000,000 just to stay open and market aggressively. While they have an impressive war-chest, it’s puzzling to think why a company still needs to raise money if they are not profitable on this amount of assets. In addition, as a venture-backed company, they only have two options in the future – get bought or go public, and who knows what option will be best for them.
They sound really big. Are they in competition with advisors like yourself?
I’m a fan of their approach – not something many financial advisors might say – because it streamlines a process that can be streamlined. I even invest my own money in their platforms and have some clients use them as well. While it’s possible for these companies to co-exist with advisors and serve different clients, it seems that these companies aren’t happy with playing in the same sandpit. Most recently, Wealthfront changed its CEO (make of that what you will) and he wrote an ugly piece on why robo-advisors were better than traditional, in-person relationships (you can read it here). Not only was it a sales piece with an aggressive overtone, it stated that advisors who charge a certain way were not as intelligent as others who chose a different fee structure.
Talk about getting me getting hot under the collar – not only was it inaccurate and inflammatory, but it didn’t speak to the larger mission that both of us share which is helping everyday Americans get the financial guidance they need. He went as far as breaking my two cardinal rules – taking advantage of people and claiming to have the fix for everything – and that’s something that I won’t forget.
But isn’t their service cheaper than yours, so he has a point?
In full transparency, yes. Betterment and Wealthfront’s consumer facing services are cheaper than my investment management services. In my defense, I’m not claiming to be cheapest nor do I want to be. In speaking with prospective clients, I suggest that some of them use the “robo” option, and not my own, because it would serve them better. My planning and investment services are not meant for those looking for the cheapest price but for a personal relationship with a partner to guide you on your own customized financial journey.
In offering a similar service to my own, I don’t hate on them, like what was done in the mentioned article. I think their model is a great fit for consumers who have basic investing needs that can be met by model portfolios. But not everyone needs that. Some people need customized portfolios to fit their situation; others need to know that they have a person to talk to about their investments and it’s not someone they don’t know in a call center, while others don’t trust algorithms because of what happens when algorithms go wrong on Wall Street – you get “flash crashes”.
So, their service is different, but why say “they won’t save me”?
Investing is part science, part art and the rest is behavior management. Building, maintaining and optimizing an asset allocation is the science of investing – understanding what investment mix is appropriate, which account certain investments should go in, and when to rebalance these accounts when markets bounce around. Robo-advisors have this nailed. They can do this better than many human advisors.
But they lack in other areas. They can’t tell you if your asset allocation is actually appropriate for your financial plan because they’ve only asked you a short series of questions. They can’t ascertain if the day you took the questionnaire you were “off” and didn’t really give true answers. Only human advisors can sense these things by being in the room with you, and having a conversation about it. A robot can’t see your face when the market drops 25% and you actually realize that this portfolio is more aggressive than you want it to be. A human advisor doesn’t have to hear any words at all – they can see it on your face – to suggest a change. This is the art that is lacking in a robo relationship.
Finally, a robo-advisor cannot influence your behavior and protect you from yourself. If you contact a robo advisor and ask them to send you 50% of your portfolio, they’ll cut the check and you’ll have it in a couple of days. A human advisor will be able to ask questions about this big withdrawal, ascertain if there might be a better way to get this money, and also fill you in on how this implicates your overall financial plan. While a robo is efficient, they can’t have an emotional conversation with people.
So where does that leave me, someone who needs help with investing?
It leaves you with three questions:
- What are my investing needs?
- Can I accomplish them with a robo-advisor and model portfolio, or do I need to talk to someone human?
- Do I want to work with someone who will take the time to understand me and my needs, and then design my investment appropriately, knowing this will cost me more money?
If you are ok working with a robo-advisor and don’t need guidance, then go for it. Just be aware that you will have to save yourself from yourself when hard times come, the “robo” won’t be able to help. If you value a human relationship and are ok paying more for this type of service, my contact details are on this website.
As it stands for my clients, we’ll be moving completely away from the “robo-advisor” platform this year. I want to play nice with everyone, and if there’s a bully in the sandpit, I’m getting out.