There’s a shiny new toy on the wealth management shelf, and I, for one, am not all that impressed. You may have heard the buzz about robo-advisors from investment sites like Betterment, Wealthfront and even big firms like Vanguard and Charles Schwab. These online tools have really taken off with the millennial generation. In fact, in the first three months after their launch one site had nearly $3 billion in investments. So should you trust a machine to manage your hard earned money?
What Is A Robo-Advisor?
Roboadvisor is really just a jazzed up term for a computerized algorithm. These types of investing formulas have been around for years, but now they’re backed by welldesigned websites and marketing campaigns. These tools allow users to go online, enter some VERY basic information and then hand over their investment choices to a computer with no real choice in what you’re money is being invested in. Issues may occur with this strategy for a few different reasons. Inexperienced investors may not truly understand how to determine their risk tolerance or even the different types of investments and may enter information that isn’t accurate. A human financial advisor can walk you through the entire process and make sure you know what your options are.
What About the Cost?
You’ll likely hear a lot of talk about how these online investing tools are low in cost compared to a human financial advisor. Most robo advisors charge a percentage fee based on the size of the portfolio. While this may appear cheaper at the onset, you may find hidden fees for services including minimum initial deposits, single stock diversification, direct indexing, tax loss harvesting, fractional shares, and even for speaking with an actual human advisor.
You Can’t Build A Relationship With A Computer
One of the benefits touted by robo-advisor firms is actually, in my opinion, one of the biggest cons. They assert that taking the emotion out of investing will yield better longterm results. But let’s be honest. there are few topics more emotional than your financial future. The last time I checked, robots weren’t capable of getting to know the person behind the dollar amount. Unlike a human financial advisor, robots can’t talk to you about your hopes and dreams and the fears that may be holding you back.
I have a strong relationship with my own financial advisor, and I encourage you to develop the same with yours. A while back, I decided to invest in some silver coins. And, I bought quite a few of them. I mentioned this new tactic to my advisor. He knew that was a bit out of character, so he asked me to tell him the REAL reason behind my new coin collection. That’s definitely not the kind of service you’ll receive from a robot.
You should know by now my feelings about the retirement crisis in this country. So if using a robo-advisor will get people to start saving then I suppose that’s better than nothing.
Remember it’ retirement we’re talking about. The more you know and understand, the better off you will be.
MBA, QKA, CBC