Robo-advisors: The future of investing or the latest financial craze?
The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on July 21, 2017. Read it at The Tennessean here.
The financial services has not been immune to this disruption. In 1980, there were approximately 5,500 people working on the floor of the New York Stock Exchange. Today, that number has dwindled to around 700.
This mass decrease is mostly attributable to electronic trading. Some of the other technological advances have affected the industry I work in in unexpected ways. I don’t believe that 30 years ago many financial advisors would’ve guessed that there would be an option available for people to work with a robot who would give them financial advice. However, today that is very much a possibility and robo-advisors are on the rise. But, the biggest question is, are they right fit for you and your family?
What are they?
Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. Typically, a client will take an online survey to give data on their current financial situation and future goals. Then, the robo-advisor will compute where the client should invest his or her money. Most advice is based on modern portfolio theory.
In the United States, there are currently over 200 robo-advisors and more are launching every single day. In general, the fees associated with this new way of investment advice range from free to about 0.75 percent. There is normally not a minimum that is needed to start investing, unlike many financial advisors.
They are limited to what types of accounts they can manage. They generally stick to IRAs and taxable accounts. Having only begun in 2008, they’ve had a relatively short existence thus far.
Where is the emotion?
While I realize that I undoubtedly bring some bias to this discussion, let’s explore three ways in which working with an advisor is different than with a robo-advisor:
Holistic approach: Many advisors, the firm I work for included, approach managing money holistically. Yes, we actually manage the money inside your account(s). However, we do so much more. Do you need help evaluating or buying insurance? Do you have an estate plan for how your money should be distributed when you pass? How should you invest the money in your 401(k)?
The list is endless. While there are some robo-advisors that are offering add-on services to help with questions outside the scope of managing your money. However, those services do cost money. My firm, for instance, does not charge for these services. We charge one fee that encompasses everything.
Not just a number: Money is emotional. When you decide to use an advisor, you’re entrusting someone with your livelihood, your hard-earned dollar and your financial future. The stock market moves up and down on a daily basis. It can be a stressful experience to watch those movements. Part of my job is to explain to my clients why their account is doing well or why it isn’t. Do you want to be just a number in a computer? Can your advisor answer your questions when you’re concerned with the direction of your account?
Fiduciary: As a reminder, a fiduciary duty means that a financial advisor must have a client’s best interests in mind at all times. Not all advisors currently operate under this duty; however, the industry as a whole is moving in this direction. There is also quite a debate on whether or not robo-advisors can uphold this duty. Can a robot have your best interests in mind at all times?
Know your advisor
As always, I want my readers to make smart, informed financial decisions. You might be just starting your investing journey, which is often the reason investors go with robo-advisors. Perhaps there’s other good reasons. Whatever the reason, just remember that, as with many things in life, the cheapest option is not always the best option.
Jennifer Pagliara is a financial advisor with CapWealth Advisors.