Robo Advisors Have Arrived, but Life Often Calls for a Human Touch

Nicole Milici |

There are critical things that people can do better than computers.

After years of development, numerous Robo-advisors have entered the world of investment management. Still, many investors may not fully understand exactly what Robos do, how they do it, or why they should skip any marketing lures to automate management of their important financial assets.

A Robo-advisor is a digital platform that uses advanced algorithms (based on various financial models and assumptions) to select and manage investments. To keep costs relatively low, portfolios are typically composed of exchange-traded funds (ETFs) that track market indexes. The recommended allocations, available strategies, and various other features can differ significantly from one service to another.

To start the process, the investor usually fills out a standard online questionnaire designed to determine his or her risk tolerance and investment objectives. The software builds a portfolio with a mix of assets that attempt to align with the client's basic short and long-term financial goals. Once the portfolio is established, the software may be programmed to automatically place trades, generate reports, rebalance portfolios, and perform other asset management tasks.

This kind of technology may be appealing to younger investors, who are comfortable with managing their lives on electronic devices — and who may not have as much money at stake. Robos typically have low account balance minimums, which may help investors with minimal assets get started with investing.

However, some risks may not be fully understood. Robo-advisors have yet to be tested by an economic downturn or times of extreme market volatility, when panicked and/or inexperienced investors may be more likely to abandon their investment strategies without a familiar voice to guide them through the storm. Further, automation of certain transactions may cause unintended tax consequences if not closely monitored by the client.

A financial advisor, like those on our team at Portfolio Solutions®, can provide personalized, face-to-face guidance and specific advice for their clients. To put it simply, there are critical things that people can do better than computers. Here are four examples:

1. Advisors get to know their clients

The key value of working with a financial advisor can lie in emotional intelligence and interaction. When personal relationships are formed, a financial advisor gains insight into each client's unique financial picture, including their priorities, pressing concerns, and emotional tendencies.

When challenges arise, a financial advisor can step in to help their clients overcome impulses and biases that could prevent them from achieving their objectives.

A Robo-advisor may not ask the right questions or gather enough information to accurately assess one’s financial needs and appetite for risk. An investor's emotional risk tolerance can be particularly difficult to assess. Some people who describe their personality a certain way on a questionnaire may act differently under real-life conditions.

2. Advisors offer more choices and comprehensive service

Robo-advisors can manage investment assets and may charge a low fee. But robo services are typically limited to portfolio management, and their reliance on ETFs means that investors may not have access to other investment vehicles and strategies. A financial advisor will often have a wider range of asset classes to choose from and may be able to build a broader investment portfolio — or a more focused one — depending on the client's goals and risk profile.

A full-service investment advisor can help meet additional financial needs and provide customized advice that is much wider in scope. Recommendations might incorporate debt management, insurance protection, college funding, gifting, tax strategies, wealth transfer, Social Security claiming options, and retirement income planning.

As with any investment account, investors who use a Robo- advisor should understand the specific services that may or may not be included (such as rebalancing and tax-loss harvesting) and how and when these services will be performed. Investors should also be aware of all costs associated with the services (including costs charged by third parties).

3. Advisors provide accountability and perspective

What happens when an investor veers off track and is not making sufficient progress toward his or her stated financial goals? The discipline of regular checkups with a real person who cares about a client's future might inspire more realistic decisions about spending and saving.

A financial advisor can keep clients better informed by discussing the financial issues that matter to them, which may help give them more confidence in their decisions.

4. Advisors can lend emotional support

Another strength of working with a financial advisor is the ability to listen and lend emotional support through life's transitions, some of which may call for a shift in financial strategies. Having a dedicated person to connect with during difficult times could help ensure that short-term issues don't derail an effective long-term strategy.

If you have specific questions or would like to discuss recent changes in your long-term financial goals or financial status, please don’t hesitate to contact us by calling (248) 689-1550. Not a current client, but ready to get started? Click here to schedule a phone consultation to learn more about Portfolio Solutions® and how we can serve you!

 

 

All investing involves risk, including potential loss of principal, and there's no guarantee that any investment strategy will be successful.  Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

All information presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service, nor should it be construed as tax or legal advice. Please click here to see our blog disclosure, which immediately follows the “Applicable Law and Venue” section.

 

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