Robo Advisors are automated investing platforms that allow an investor to automatically invest in the market without the use of a human financial advisor. The most novel aspect of these systems is the technology allows tiny investments in securities, even in pennies. These systems were first touted as ideal solutions for those that were very young and those of modest means, but these firms have been marketing themselves to more affluent investors as well. Startups like Betterment and Wealthfront have gained large numbers of accounts, and older firms like Vanguard and Schwab have created their own versions and have amassed over a billion dollars in investor assets in short order.
Interestingly, nearly all the Robo’ have come full circle to recognize the value of a live human advisor in conjunction with their technology by either hiring advisors and financial planners, or creating a portal for unaffiliated advisors to tap into. This recognition was not always there, in the beginning the Robos initially described live human advisors as unnecessary.
The positive aspect of Robo’s is that indeed these systems allow anyone to begin investing with ease and for tiny amounts. In fact, services like Robinhood don’t charge any commission at all. It can be a very positive experience for young people to save and invest, which was much more difficult and expensive in the past. Another positive feature is these systems make it much easier for traditional advisors to accept smaller clients and build relationships and educate investors in a way that was not practical before.
However, there is a danger in using Robos. First and foremost, Robo marketing only promotes their product naturally, but to the exclusion to all the other aspects of what can be covered in the area of advice. Savings, debt, taxes, insurance and many other topics are vital aspects to one’s financial health. There are millions of people with debt where a financial planner can make a good argument that perhaps investing is actually a bad idea right now, but paying off that debt faster instead is far better in the long run.
Second, investing in a basket of mutual funds or exchange traded funds, which most Robos offer, is not ideal for everyone. Investors with portfolios of over $500,000 should at least be aware of individual stock selection as well as alternative assets such as real estate, private equity and other investment vehicles. Robos do not educate on these options and their merits.
Finally, investing and wealth management is both art and science and as such demands a human in the process to guide the investor. While Robos have embraced live human advisors as discussed, their marketing often does not. Clients need to be educated which is not a cookie-cutter process, need to be spoken to and calmed in times of tumult and also need to be nudged in the right direction for their own good. This is where only a live human advisor can hope to help the investor.
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