Robo-Advisors may be just what we need!

Should you really fear Robo-Advisors?

Reading financial news, you see many posts warning of robo-advisors, telling you how you really need a human advisor, how you can robo-proof your investment business, or how robo-advisors are merely a fad and will die off when everyone realizes how evil they are.

All these posts have it backwards. They are apologists for entrenched firms attempting to protect their turf when individuals need help.

Shift from pensions to 401(k) plans hurt individuals

Last century, many large employers provided pensions as a benefit. These were large portfolios that could hire good advisors and thus performed well. However, by the end of last century, retirement funds had shifted to 401(k) and similar plans, where individuals managed their own portfolios.

Institutional portfolios hire great managers so many are able to beat their various market indices. In contrast, individual investors historically achieve less than half the returns of their related indices.

Poor performance by individuals managing their own retirement funds is a key factor in the current crisis facing Boomers who are under-funded for retirement. (Note to Millennials: don’t just speak to your parents, do your own planning so this doesn’t happen to you!)

Why do individuals invest poorly?

Individual investors are seen as a contrary indicator:

  • If they are buying, then the market is near its peak and it is time to sell; and
  • If they are selling, the market has reached its bottom and it is time to buy.

Here is a case in point:

We saw the regret and pride response in action beginning in March 2000, the largest purchase of mutual funds in the history of the stock market. Fast forward to 2008, just before the “Great Recession” market downturn, and stock prices were falling, but investors refused to sell at a loss. As the market continued to fall, investors held off until they simply couldn’t take it any longer. Many sold their stock near the bottom and missed the following upswing that began March 2009. Forbes – Why average investors returns are so low.

To summarize, individual investors perform poorly due to these factors:

  1. Lack of access to good investment advice; and
  2. Investment psychology. For more on the psychological factors to which individuals fall prey, see Seven deadly sins of investing to avoid.

There is a third factor: High expenses in form of commissions and other fees.

Robo-advisors address all three factors. 

  • First, automating advice permits good advisors to offer services to small investors. Betterment with automated rebalancing and tax-loss harvesting is a good example.
  • Second, automation lowers costs, so fees charged can be reduced. Combine that with use of ETFs and you have dramatically reduced expenses.
  • Last, robo-advisors are immune to greed and fear so their performance will not suffer the way performance of individuals may. No robo-advisor would wait until the market hit bottom to sell, as in the case of 2008 summarized above.  

Bring on the Robos!

What is my conclusion? Not only are robo-advisors here to stay, they may be just what individual investors need so they can retire well!

What I learned with my website failure

Yes, robo-advisors are coming. But, I seem to have missed that boat, er self-driving car.

In the effort to design and launch a financial planning website for young people, I learned quite a lot. One thing I learned is that a good idea, even one that many people think is up and coming, is not enough by itself. In fact, it takes a great deal of effort plus substantial capital to launch an effective site. And even then, there is no assurance that you have a successful business.

We did preserve the content that we created and used it to launch a financial literacy website. We hope that people can use this site to better understand their finances. But it will not be a source of revenue: too few want to pay for financial planning advice. It may be the same phenomenon as people searching online for medical questions instead of paying to see a doctor.  Who knows?

Another thing I learned over the last couple of years is that I really enjoy human interaction, helping people solve problems. Creating a robo-planner website wasn’t going to satisfy that need.

So what am I doing? I’m back to concentrating on my law firm, providing financial planning and related legal work plus adding divorce mediation to my business.

Before concluding this post, there are so many to thank. The list of advisors, consultants and friends includes, in no special order: Joseph B. Lassiter, III, Francesca Bartholomew, Shannon M. Bénay, Sima Patel, Jeff Benson, Carl Muscari, Howard Zaharoff, Elliot Sloyer, Peter Demuth, Mark J. Deck, Elliot Kaztman, Catalina Gorla, Meredith McPherron, Jason Yarrington, Ron Aines, Chris Lovell, Amanda Cripps, Adam Weisman, Alyssa Windell, Beth Marcus, Mary Anna Mancusco, Scott Branson, Marissa Branson, and so many more!

Thank you all so much for a great adventure!

Steven

Should we use Robo-Advisors? I don’t know, let’s ask Siri!

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Any web search for “robo-advisors” (or robo-advisers, robo-planners, etc.) produces an interesting spectrum of content, from “for” to “against,” with a fair share of “undecided.”

Some posts are ready to embrace new technology. See Robo Advice? Bring it on, it will be great for business by Tony Vidler. He says robo-advisors:

will be good for business for those advisers who provide real value and are smart marketers. The Robo’s will probably kill off the bottom-feeders in the business, together with those who have no genuine advice-based value proposition. Perhaps that is an unfortunate consequence, but then, maybe it isn’t.

We also like Neil Wood’s post “Are You Prepared For the Tidal Wave Of Assets Going Into Robo-Advisor Programs?” He says:

Remember the stock jockeys of the 1970s-1990s that refused to embrace financial planning? Many call them dinosaurs that died with a change in the way our industry did business. There will always be new competitors in our industry. People want faster, cheaper, better, improved, more powerful and a so-called better mousetrap.

But many posts are threatened by new technology. For example, the title alone in the post by Sara Grillo puts robo-advisors in a derogated status: Why a Robo-advisor is Like Getting Financial Advice at a McDonald’s Drive Through. More on Ms. Grillo in a minute ….

Here is another, where the title of the article by Craig Iskowitz sounds as if he thinks robo-advisors are a passing fad: Dead Robo Walking: Why Wealthfront is Doomed. However, he provides real analysis of the new technology and differentiates the growing field of robo-advisors, calling out Wealthfront as an advisor he believes failed to prepare and execute well. Wealthfront may not do well, but Mr. Iskowitz sees it as losing out to other investment firms, both robo or traditional. (Also see Robo-Advisors may be just what we need!)

Finally, there are some who purport to be threatened but may in fact be carving out their own turf in the robo-advisor space. Ron Lieber believes that is what JP Morgan is doing. See “Jamie Dimon Wants to Protect You From Innovative Start-Ups.

As I said in What is a financial plan?, that those who insist that robo-advisors will not replace individual, human planners comprise the “There’s no app for that” group.

Hold on, Steven. This is Siri. What about me? Where do I fit in?

Well Siri, you are a robo-voice, not an advisor.

But you ask me questions all the time!

Yes, I do. But I don’t count on you for life-changing decisions!

I’m hurt!

Enough! As promised, back to Sara Grillo. In the end, she thinks robo-advisors “are a good way to get financial advice for those who have no emotion attached to their money, a long time horizon, and simple requirements.” However, if you need more attention, then she expects you to pay a human for advice, despite the $500,000 portfolio minimum threshold barrier.

Should that be the cutoff? You have to already be wealthy to get good advice? We think it shouldn’t.

Imagine that, as a financial planner, CFP or other advisor, robo-advisor technology frees up more of your time. You could use that time to provide more advice to clients or to advise more clients. Just like the introduction of word processing and desktop computers in offices decades ago, technology brought efficiencies and created a massive shift in how we use time.

Or Imagine that we can create a robo-advisor website that will provide the sort of advice that a human would, even encompassing the issues Ms. Grillo suggests: “complicated trust and estate issues, a need for cash flow planning.” This is my hope for the website we are building, that we can make the essence of human financial planner advice accessible to those who made need it most, who have not amassed great wealth – yet.

Technological change comes in many forms and constantly evolves – that is a constant in our lives. Those who resist are often buried in the process – Neil’s dinosaurs. Those who would adopt and adapt fare far better.

Don’t you agree Siri? Siri?

I’m not talking to you until you apologize

Oh boy.