The robo-advisor concept suggests that advisors, the flesh-and-blood kind you meet with personally, overcharge and are only for the rich. Aside from the fact that this contention is a crock of baloney, living and breathing advisors are far superior to the online alternative. Reason: They know you better and furnish a full range of counseling, not just canned investing tips.
The Web advice business, for the most part, offers templates that guide your investing, based on a simple questionnaire. Human beings, however, have needs that are far more complex than a paint-by-numbers approach can accommodate.
Robo-advisors may charge 0.25% to 0.30% annually of assets under their management. Physical advisors who run your money usually charge around 1% – except for stockbrokers, who get paid by sales commissions, and advisors who don’t assume control of your assets. The latter type may charge anywhere from a few hundred to $1,500 per year to tailor a plan for you. While higher, those fees are not exorbitant, and well worth it for the better service.
The notion that physical advisors are solely dedicated to the big-bucks set is ludicrous. A Cerulli Associates study shows that the vast-majority of advisor clients have portfolios far below $100,000. Plus, advisor organizations like the Foundation for Financial Planning provide free advice to people of modest means.
Going with a robo-advisor is like buying a house with half a roof: You save on roofing costs, but when it rains, that’s not much solace.
Robo-advisors also give scant attention to true wealth management: planning for your estate, taxes, insurance and all the other life contingencies that lie outside of investing. Expanding your portfolio is wonderful, yet what you do with it and how you protect your family are areas that robo-advisors seldom can help you with. Besides, all too often, these automatic planners give you only exchange-traded funds that track well-known indexes. Forget about trying to beat the market.
But what’s missing most with robo-advisors is the personal touch. Some of these companies offer 800 numbers so you can talk to a person, which usually amounts to someone different every time, someone who doesn’t know you.
If a baby is on the way, no cookie-cutter algorithm can tell you the myriad of things you need to do to prepare for the enormous change in your life, and how to plan for your young one’s future. If your spouse dies – the life partner who handled all financial matters – a computer screen or a stranger’s voice on an 800 line can’t replace a trusted advisor who lives nearby and can rush right over. That advisor knows you and your family – the robo-advisor does not.
Most importantly, the next time the stock market takes a dive, no automatic planning service will be there to hold your hand and prevent you from panicking, such as by selling all your shares, a decision you will regret once the market rebounds.
Will robo-advisors replace real financial advisors, with specialized knowledge who spend the time getting to know each of their clients? I don’t think so.