The robots are rising and they’re after your money.
Many people in the financial planning and investment industries have been buzzing about robo-advisors, algorithm-driven computer programs that offer consumers portfolio management services.
Could these robo-advisors replace human financial advisors altogether? What are the advantages of employing a robo-advisor? What are the risks? Could these robots be the right advisors to entrust with your financial future?
Before you hand all of your money over to a robot, consider these three things you need to know about robo-advisors.
#1. Robo-Advisors Are Not A New Technology
The technology that has become known as the robo-advisor originated in the ‘90s as a retirement planning tool for investors who didn’t have the time or the resources to employ a human financial advisor. These tools helped investors make decisions about where to invest their retirement funds.
Over time, the algorithms fueling these tools have evolved, and now the consumer market is flooded with different robo-advisor tools.
In fact, many of today’s wealth managers and financial advisors use financial planning software that, while typically more advanced, offers similar capabilities to those of robo-advisors. These advisors then take the calculations that the tools generate and use them to craft detailed financial plans for their clients.
#2. Robo-Advisors Come With Some Risks
When deciding whether to work with a robo-advisor rather than a human, it’s important to note some of the risks these advisors pose.
First, it takes very little time to set up an account and investment strategy with a robo-advisor. Some robo-advisors ask investors as few as six questions before instructing them where to invest their money. It’s nearly impossible to understand all of the important facets of an investor’s profile and goals in just six questions.
At Richard Brothers Financial Advisors, we ask approximately 20 questions about an investor’s goals, 12 more about their relationships and another 15 to 20 about their assets. This helps us build a plan and provide advice that is truly tailored to the specific investor and the financial future they hope to build.
Writing in support of robo-advisors in a recent Wall Street Journal article, Lisa Kramer notes that “humans often make costly errors.” While Kramer, a professor of finance, highlights the machine-driven objectivity that robo-advisors offer, it’s important to note that investors make mistakes too.
Far too many investors don’t know how to properly calculate their net worth and what they have in investable assets. If these figures are entered incorrectly when setting up a robo-advisor account, there’s no one to determine the error, and the financial consequences could be severe.
With a human financial advisor applying rigorous quality control standards to each investor’s data integrity, there’s an opportunity to catch the error and make necessary adjustments. Due to the more personalized support and quality assurance provided, human financial advisors still have an edge on robo-advisors, especially when comprehensive wealth management services are factored in.
#3. Robo-Advisors Are Important To The Future Of Financial Planning
Despite the associated risks, robo-advisors do offer tremendous value to investors and to the future of financial planning.
For instance, many investors, especially younger ones, don’t have the minimum amount of investable assets required to work with financial advisors. With their lower required minimum balances, robo-advisors could be a useful resource for these lower-net-worth investors.
Additionally, some younger investors simply don’t want to take the time to have regular face-to-face meetings with their financial advisor. Employing a financial advisor you don’t actually meet isn’t going to yield much value.
Because of their accessibility and lower cost of entry, robo-advisors are a great tool for younger investors to begin their investing journey. After all, if the choice is between using a robo-advisor and no advisor at all, the robo-advisor is a much better option.
Robo-advisors are also important because they help fill the gap left by the declining number of financial advisors. As a 2015 Reuters article notes, the total number of financial advisors in the U.S. dropped 12 percent between 2008 and 2014, and another 100,000 advisors are expected to retire by 2025.
Choosing Between Human Advisors And Robo-Advisors
So, should you choose a human financial advisor or a robo-advisor? The answer depends on your situation.
If you’re just starting out with investing and don’t have the minimum balance required by many human advisors, then a robo-advisor is a good option. Just do your due diligence to ensure the figures you provide are accurate.
If you’re further into your investing journey and have enough assets to work with a human advisor, that’s likely a better option for you. You’ll get more personalized service and advice tailored to your unique situation and goals.
Are you wondering if you are saving enough money for retirement? Check out this calculator to see if you are on the right track.
