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Should You Trust Your Money To A Robo-Advisor?

| November 10, 2015
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Robo Advisors

Should You Trust Your Money With A Robo Advisor?

Robo Advisors Vs Financial Advisors

You might not expect a flesh and blood financial advisor to have anything good to say about online financial advisors, but Matt Logan says there are positives. 

Robo-Advisors are companies such as Betterment, Wealthfront, Wisebanyan, Personal Capital and Future Advisor.  They are companies that use advanced technology to help manage your financial life.  "Although they were dismissed by the traditional financial industry when they fist came out, they have come quite a way since they began around 2008.  Well, seeing as they commectively managed around $19 billion as of December 2014 according to a study by Coprorate Insight, I thought we should look at them."

 The Good

Lower cost: The best thing about Robo Advisors that I can see and that sets them apart is the lower fees.  As with any online platform that uses computers and programs instead of live human beings, the costs of doing business can be dramatically lower.  These lower fees help investors keep more of their money and can ultimately help with returns.  Many of these platforms also use ETFs as their investments.  These are Exchange Traded Funds that are built to mimic different investment exchanges and offer again, lower costs than many actively managed mutual funds. 

Better technology:  For the most part, the traditional investment advice channels have fallen behind the technology curve.  Some people attribute this to failure to adapt, other tie it to heavy regulations.  The new Robo Advisors do offer user friendly platforms.  While some advisors do now offer the same technology, most do not.

Availability:  Many of these platforms offer to serve a very underserved demographic: the mass affluent.  This is due to the fact that most advisory firms tend to have high investing minimums and focus on millionaires and not your average American.  This is a great thing as many people now have access to investment help that they may not have had in the past. 

 The Bad

The Human Element:

Robo-advisors are just that, they are computers.  While I may be biased, I am amazed at the different circumstances that people present when they come to me for advice.  I am not the smartest guy in the world by any means and find it hard to believe that someone could put all of the variables of a human life into a series of zeros and ones.  

Emotions:  We have discussed emotions and investing before.  For good or bad, we are all loaded down with different emotions and biases.  Digging through those emotions and figuring out a plan to address your investments based on that is very complicated.  A robo-advisor does not offer a human to speak with to talk those through and to assist in that arena.  Empathy and understanding simply cannot come from a computer program.

Time Test:  Having for the most part started in 2008, most of these platforms have not survived through a major market downturn.  The next time we have a major market adjustment will be the first time that we see if the algorithms get it right or if they send investors back to the traditional financial advisors.  As you can see, the S&P 500 has grown significantly since 2008 and these platforms have not yet had the test of a big drop.  The following chart from J.P Morgan Illustrates the S&P 500 since 1997.  

Although I have tried to look at this in an unbiased manor, I still may be a little biased on the subject, so please keep that in mind.  Based on the information I have reviewed, I do believe that robo-advisors are here to stay and do offer a lot of good.  I still believe that the human aspect of financial life is very viable and trumps that of the robot.  One of the most telling signs of this came from a well known financial speaker and advisor Michael Kitces.  He pointed out that many of these robo-advisor companies have recently just did the unthinkable: hired people.  Companies life Betterment have added another offering, called Betterment Institutional where you have access to a human being.  Others have followed suit and the result is a hybrid with slightly higher expenses in most cases.  The shift may prove that people still prefer the human advice for the most part. The following came from author Bill Winterberg and summarized the difference well.


Disclaimer:Matt Logan is a Representative with Matt Logan Inc and Summit Brokerage and may be reached at, 336-540-9700 or [email protected]. Matt Logan Inc is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice

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