We’ve entered an age where yet another industry is slowly beginning to give way to robots. It makes sense when you’re dealing with repetitive actions that can be accomplished precisely and without damage to human muscles. However, when you consider the volatile and personal nature of finances, it’s difficult to reconcile a world where “robo-advisers” will be handling investments. Yet, robo-advisers are here and robo-adviser companies are growing by leaps and bounds.
The very phrase “robo-adviser” conjures up images of the Star Wars character, R2D2, but that’s not exactly the correct image. Just what is a robo-advisor and can they really serve investors better than a trained, experienced and educated living human being?
Robo-advisers are online wealth management sites that provide automated investment services. Currently they represent a small, but fast growing segment of the market. No human interaction is required. They use computerized algorithms to manage mutual funds, exchange-traded funds (ETFs), index funds and other retirement products.
Typically robo-advisers follow a passive investing strategy in an effort to try to minimize risk. They are low cost and sometimes even no cost, which is what makes them so attractive and has fueled their popularity among younger investors over the last few years.
Finances are emotional and highly personal
Could you imagine trusting your health to a robo-doctor? Your financial health is second only to your physical health and wellbeing. When you trust your finances to a robo-advisor you are left with huge portions of your financial life completely unattended. A good financial advisor does far more than merely deciding which funds you should have in your portfolio.
Nonetheless, many people are turning their investments over to robo-advisors. And even though robo-advisers must be registered and are regulated by the Securities and Exchange Commission (SEC), they are held to a “suitability” standard, not a fiduciary standard like real advisors are held to. Human financial advisers are legally required to give you the best possible advice while robo-advisers will offer or suggest investment that are just suitable. So your best interests are not being served.
Will a robo-adviser call you to explain when something critical happens with one of your investments? Will they answer the phone and walk you through a confusing letter you might get from the bank? Will a robo-adviser know you and have an understanding of your short and long-term financial goals? Will they be there to guide you through the unexpected ups and downs of your life? Of course they won’t.
Real advisors are there for you when you need them. They are trusted with the most intimate details of your life. They understand your personality and they go through life’s ups and downs with you. They get to know your family. They attend weddings, anniversaries, graduations and funerals. They plan your estate and help you with your taxes, college funds and so much more.
You want an advisor who will answer the phone when you get a confusing letter from the bank and walk you through what it means. You want someone who knows you personally and understands your short- and long-term financial goals.
Your finances are too important to leave in the hands of a robo-advisor. To make the most of your financial life, you need a real financial advisor.
Mathematical algorithms are amazing and have contributed significantly to the financial world. However nothing beats the insight and experience of a real financial adviser.