You can automate virtually all investment processes these days, so that an individual can get almost everything, from an investment plan to securities purchases and rebalancing, done on their own. But you can’t automate human emotion.
In a compelling drama that has seen the rise of “robo advisers” challenging the models of traditional financial planners, brokers and wealth managers, most people see this as some fight to the death between automatons and people, with either the Terminators or the human race ultimately being triumphant.
If you leave the drama at the movies, however, what you see is that both sides can peacefully coexist largely because they provide complementary services in very different fashions.
Yes, there will be a lot of casualties of both advisory firms and robo-adviser platforms in the next few years, but the ultimate winner in this contest is clear: It is the consumer, who will wind up with improved access to superior financial advice at a lower cost, and who is likely to start planning and managing his or her finances earlier in life as a result.
To see why the consumer wins, we must first look at the battle and break through the hype.
Robo advisers are automated investment services that promise to make financial planning and execution easy, inexpensive (or downright cheap) and even fun. Technically, they rely on algorithms and formulas to take the pain and uncertainty out of investing by building a portfolio (typically of low-cost exchange-traded funds), rebalancing it periodically over time, reinvesting dividends and more.
Whether it is the better-known options like Betterment, WealthFront, FutureAdviser, Motif Investing or new choices like SmartPlanner, Blooom or Charles Schwab’s new robo adviser, the idea is to come away with professional-grade help at minimal effort and cost.
All the individual investor really needs to do is answer some questions, provide some information, maybe choose a stocks-and-bonds allocation from a list of options (or maybe not, if the adviser selects one based on the client’s age), and the system does the rest.
The consumer also needs to decide which robo-adviser platform to use. For most robo sites I have seen, costs range from free (typically for a limited time or a small-dollar account) to 0.5% of assets under management. There can be flat fees monthly or annually. Some services limit investors to exchange-traded funds, while others offer more flexibility; most don’t allow investments in individual stocks. If harvesting tax losses is important to you, shop around until you find that feature. Some manage the entire portfolio, and have custody of your money, while others give advice and leave you to implement it yourself.
It is a high-tech approach to financial planning
The problem is that what most people want when seeking advice is the “high-touch” approach, the hand holding and human contact that provides the emotional discipline to stick with a plan when the going gets tough, and the knowledge that the plan really fits one’s personal situation.
The difference isn't really about getting advice online compared with receiving it in person, because many traditional advisers and planners now use meeting and collaboration tools — coupled with video services like Skype — to offer their services over the Internet.
The contrast here is between getting advice from a computer-driven algorithm and from a human being.
(I should point out here that some services typically lumped in with robo advisers — notably Personal Capital and Vanguard’s Personal Adviser Services — are taking information that is input online but providing advice that is crafted and delivered by humans.)
Saving money and eliminating the expensive human factor — something the robo advisers crow about — is great until you recognize one simple fact: It isn’t the dollars and cents, but the ladies and gents.
Financial planning is all about the people — the emotions they feel, the desires they have, the fears they face, and the situations in life that are, mostly, unique to them.
You can’t “robo” retirement
Not in a world where some people will be offered early-retirement options by employers anxious to cut payroll, or where others will simply face job loss. Algorithms only work with appropriate inputs and don’t deal well with problems that fall outside their normal purview; if you’re like my neighbor who suffered a stroke at age 55 and was forced to retire at least 10 years early, or like the friend who has a special-needs child who will require care and financial support for the parents’ lifetime and beyond, a consumer-friendly online interface is limited in how much counsel it can provide.
You don’t need special situations, either. You can just be choosing what you want to do next in your life; “lifestyle planners” help clients not only reach their needs but decide how to achieve their dreams, whether that means retiring to the golf course, owning an inn in New England, or simply playing bingo every night in a comfortable retirement community.
A robo adviser can’t have those discussions with you.
And many people want to talk to someone when it comes to their complicated decisions and life choices; they want to hear how others handled situations and be offered options rather than computer-driven “solutions.”
Ultimately, even some of the staunchest supporters of robo advice recognize that their services are a great starting place — allowing investors to start small, cheap and easy — but that there may come a point at which the client wants to transition from cyborg help to human assistance.
That is fine; it doesn’t have to be an either/or choice. Moreover, robo advisers are new enough that hybrid services and human-touch options are evolving, so that consumers starting online today may be able to transition seamlessly to where the services they use down the line include real people whose job is to provide the emotional discipline that is not easily gained looking at a computer screen.
“Algorithms are great at solving stuff that an algorithm can solve. … Emotion and behavior plays as big a role as skill ever will; this isn’t just about spreadsheets and calculators,” said Carl Richards, a financial planner who has studied investor behavior and who recently wrote “The One-Page Financial Plan.”
“Of course, we have to be good with calculators and spreadsheets,” Richards added in an interview on “MoneyLife With Chuck Jaffe,” “but you can cut your own fingers off with a robo adviser just as quickly as with a non–robo adviser, so let’s get clear about this emotional component so we can use all these amazing tools we have access to and make a massive difference in our lives.”