We’re hearing a lot about Robo-Advisors these days. Are they right for you? Let’s find out;
The financial services industry is no stranger to developing new products and innovations. Years ago, it was different types of stocks and bonds, then mutual funds were launched. More recently, exchange-traded funds (“ETFs”) that mimic indexes were launched. These days, robo-advice is a hot topic. While having features that are certainly attractive to some investors, Robo-Advisors aren’t right for everyone.
But first, the “what?”
What are Robo-Advisors?
The term “Robo-Advisor” is actually a bit misleading. Advisers generally guide their clients through the financial planning process to help these individuals achieve their life goals.
Robo-Advisors are automated portfolio managers that take a limited amount of information about a client and create a portfolio of holdings that usually includes a basket of ETFs. Robo-Advisors require little human involvement once their algorithm has been set.
Robo pros and cons
Robo-Advisors are programmed to automatically buy and sell holdings based on a desired risk-return profile. As there is little human involvement or management, they tend to be cheaper to invest in than actively managed portfolios. They also tend to be “set-it-and-forget-it” solutions that require very little effort by individual investors.
Since these portfolios rise and fall according to market and macroeconomic conditions, they typically don’t make adjustments to reflect the market. Conversely, as your adviser I’ve gained a deeper understanding of your financial picture, including your long-term needs and goals. Our work together means that your portfolio is suited specifically to you, and not just to a lot of people who may simply be your age and have a similar amount of savings.
Example of robots investing versus humans investing
Robo-Advisors are also not equipped to provide all of the other services that a human investment adviser can provide –
During periods of rising markets, Robo-Advisors will tend to perform quite nicely, as they reflect the performance of the wider markets in which they invest.
That said, markets don’t always go up. When markets are falling, portfolios run by Robo-Advisors will tend to drop to the same degree as their corresponding markets. Meanwhile, active portfolio managers tend to re-balance or otherwise adjust their funds to reduce the downside impact of this market weakness, and possibly even take advantage of it. By doing so, these portfolio managers are able to negate the losses that could result from market weakness, which is something Robo-Advisors can’t do.
Robo-Advisors are also not equipped to provide all of the other services that a human investment adviser can provide – including access to tax and estate planning, accountants, lawyers, and other professionals who can help us ensure that you have a complete financial plan that truly reflects your short- and long-term needs.
Bottom line is this: Will a Robo-Advisor have a conversation with you in order to fully understand your unique financial needs and goals? It’s our opinion that we can offer you much more value! Click here for a great article on Robo-Advisors. Feel free to get in touch and learn more about the benefits of a human adviser vs. Robo-Advisor.
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Posted from Admin at Association Financial Services, LLC