What No One Tells You About Robo Advisors
Selecting a robo advisor as your sole financial solution may not be the best decision. Here’s why.
Robo-advisors are the latest thing in investing, and there’s no question they’ve disrupted the financial services industry in a major way. In fact, a CNN Money article reports that, “By 2020, robo advisors will manage about $2 trillion in the U.S.”
The question that most people still wonder is if artificial intelligence can really replace people? And are robo advisors a step closer to that reality? We think not and here’s a few reasons why.
Here’s what no one is telling you about robo advisors that all investors need to know.
Robo-Advisors Are a One Trick Pony
Robo-advisors are fancy software programs that use algorithms to invest in stocks (mainly ETFs), based on information provided by the investor at sign-up. The algorithm uses age, income, and aversion to risk to create a mix of stock market investments that match your profile. That’s it. The end.
Robo Advisors Are Not Financial Advisors
Financial advisors begin by helping you understand your financial profile, where you are today financially, and facilitate discussions about your short term and long term financial goals. These highly trained professionals take your basic personal and financial data, as well as your goals and values to create a financial plan. This financial plans lays the framework for financial behaviors and strategies necessary to help you make smarter financial decisions about spending, saving, investing, retiring, tax strategizing, estate planning, and more.
Robo advisors cannot replicate the level of service that a financial advisor does, and they cannot advise you on matters that you have questions about.
Robo Advisors Only Offer One Piece of the Puzzle
The investment recommendations that are typically offered by a financial advisor are determined once you have settled on your financial goals and long-term vision for your life. Financial advisors know how to see the whole picture of your financial life, so they can create a unique, custom blueprint for what you should be doing with your money at different stages and implement investment strategies accordingly.
Robo advisors, on the other hand, offer an investment formula. They cover about step three or four in a process that probably has eight or more steps when it comes to taking care of your financial life.
The biggest thing to keep in mind is that if you are looking for a financial professional to help you manage your financial life, a robo advisor is not an adequate alternative. One does not replace the other, but one can complement the other.
If you are already using a robo advisor, you can still work with a financial advisor who can take you through their process and review what you have going on with your robo advised account and help you make any adjustments. If you are working with a financial advisor, but are interested in investing some of your money one your own, you have a resource who may be willing to help guide you through it.
Trace and I became friends through NAPFA and I asked him to write some thoughts on “What No One Tells You About Robo Advisors” as a guest topic for this site.