Well, in reality, they are here. RoboAdvisors, that is. Over the last few years, people in my industry have made a big deal about selling the services of their RoboAdvisors or hand-wringing that RoboAdvisors are the death knell of human financial advisors.
First, let’s clarify what a RoboAdvisor is. And is not.
RoboAdvisors offer people with a variety of investable asset amounts access to diversified, professionally managed portfolios. For the majority of investors, creating an asset allocation and then filling the portfolio with a well researched batch from 20,000 mutual fund and ETF options sounds about as appealing as a root canal.
On the other hand, curated investment portfolios have been thought to be only available to people with lots of money already. RoboAdvisors aim to bridge that gap by offering low-cost investment portfolios based on your time horizon and risk tolerance for a low annual fee.
Are the returns any good?
I haven’t researched to know if one brand outperforms another. Really, it’s too soon to say. What I strongly believe is that the worst RoboAdvisor will perform better than the average investor over the long term. Why? Robots make unemotional investment decisions and avoid the human psychological pitfalls that cause most people to stay in a cycle of buying high and selling low, therefore chronically underperforming the market.
Wait, won’t the robots put me out of business?
So, I’m all about the Robots. Welcome! Wait, won’t the robots put me out of business? Well, portfolio management doesn’t require a high touch – unless it’s convincing you to not abandon your investment plan during a recession. Some RoboAdvisors offer (for an additional fee) access to human financial planners for questions outside of investments and a limited level of emotional support during volatile markets.
Where experienced financial planners who happen to be human shine is the non-investment stuff. Talking through the pros and cons of a career change. Helping you wisely allocate an inheritance between various goals. Talking through whether or not long-term care insurance makes sense for you. Discussing whether to pay your mortgage off early. Gently breaking the news to clients that retirement is not affordable next year but needs to wait longer. These are not conversations you are likely to have with an investment algorithm or even the human customer service rep on the phone.
There is room in financial services for all sorts of advisors (human and electronic) just as there is room for all sorts of clients (wealthy or working toward financial independence). The key is finding the right combination for you.