When Brett was little, he worked, saved his money, and bought a three wheel ATV. He needed a helmet to keep his head safe while he was riding merrily through the neighborhood. We investigated and settled on a Bell Helmet since it was the best. Their slogan said it all: “If you have a $10 head… buy a $10 helmet.” In my opinion, the same applies to your financial future. If your financial future isn’t worth much to you, use a robo-advisor. It’s like the $10 helmet: it’s cheap, better than nothing, yet provides little value.
Robo-advisors are making the news. They are a low-cost, computerized asset-allocation software application. Folks like Betterment, Wealthfront, Vanguard, and now Schwab have been getting into the game. Users are asked to provide a number of inputs such as:
- How much are you investing?
- What is your risk tolerance?
- What is your goal?
- How long do you have to invest?
Then proprietary algorithms process the inputs and provide a “tailored” investment plan. The provider implements that plan using their recommended funds.
Here’s what people who use robo-advisors are generally not getting:
- Appropriate diversification. Use of all three asset classes: equities, fixed income, and liquid alternatives is generally not available with the robo-advisors. Studies have shown that adding non-correlated assets, aka alternatives, to a portfolio can improve return and reduce volatility.
- Wide fund selection. Robo-advisors not only get their asset management fee from customers, they typically also receive all or part of the operating expenses of the funds for the funds they recommend. Lack of independence in fund selection is a key point here since the robo-advisor’s overall income is impacted by the funds they recommend. Hence, while the asset allocation percentages may be appropriate, the specific investment choices may not be, which can lead to underperformance.
- Monitoring. Investment management is a process. “Set it and forget it” doesn’t work, particularly in the current investment environment.Regular monitoring and periodic rebalancing is required in order to continue to adapt and improve portfolios.
- Commitment to protecting your money. Let’s face it, the robo-advisors were developed and exist to collect assets and make money for their company. If there is a big market swing, like we had in 2008, don’t expect the robo-advisor to cushion the downfall. A firm like DWM is focused on your money, not ours.We’re here to help protect first and then grow your assets. Our clients are familiar with what we did in 2008 to contain their losses by reducing equity exposure and the use of alternatives.
- Guidance. Some robo-advisors do include some assistance with financial decisions in their service. Most of the advice will be generated automatically by the firm’s computers and delivered online. Compare that with a firm like DWM. Brett and I have over 60 years’ experience helping clients. In addition, as you know, we’re CFP® practitioners, CFA charterholders, and I am also a CPA. You want a sounding board that is experienced, competent, thoughtful, and sensitive to your particular personal situation, not a robot simply doing calculations and spitting out answers.
- Fiduciary care. Robo-advisors don’t sign an oath, as Brett and I have, to always put the client’s interest first. We are also Accredited Investment Fiduciary (AIF®) certificants. Robo-advisors are the latest “fad” for collecting assets and have no legal responsibility to put their client’s interests first. Their principal goal is to make as much money for their company as they can.
- Proactive advice. Don’t expect that from your robo-advisor. DWM clients know that we believe “Wealth Management is a Process, not a Product.”We have processes in place to review and monitor on a regular basis and review with our clients such important topics as financial independence, education funding, income taxes, estate planning, insurance and other matters. We have saved families hundreds, thousands, and millions of dollars by providing proactive suggestions for them in many different ways. In addition, we have collaborated with their other advisers to implement changes to help secure and protect them.
Ultimately, it’s all about what price you put on your financial future. If you want a seemingly inexpensive product (a computerized calculation of an asset allocation) and you believe that will provide you and your family future financial success, then a robo-advisor may be for you. If, on the other hand, your family’s financial future is of key importance to you and you wish to have financial “peace of mind” with an independent, competent, experienced, proactive financial advocate that employs processes in both investment and financial planning areas devoted to helping you and your family and is committed to protecting and growing your net worth and legacy, then I suggest you do your due diligence and opt for the best, not the cheapest.