You want me to give my money to a robot??
It's likely you've been hearing more and more about a brand new addition to the world of financial advice called Robo Advisors. Companies such as Betterment, Learnvest and Personal Capital are carving a niche for themselves. But what exactly is a Robo Advisor and why would you want to hand your money over to some one or some thing that has a limited ability to know anything about you, your family, your priorities or your lifestyle.
Robo Advisors aren't for everyone...
but they are for someone.
Robo Advisors remove the human element (for the most part), hand-holding and guidance from the financial relationship. For those of you comfortable with that significant difference, Robo Advisors may be worth a second look. For one thing, they are mobile-friendly and inexpensive. If you're just getting started, this may be all you need. Most Robo Advisors have a simple sign up process where they assess your age and your appetite for risk. From there, they recommend a tax-efficient, diversified portfolio and with the click of a few more buttons and payment, they set you up with an account, signed, sealed and delivered. Piece of cake. But our questions is: without having a chance to articulate your goals to the Robo Advisor, how does it know if that's really what you need? And even more so, what has it not taken into consideration?
Algorithms cannot commpute human emotion
When you get to the point where you're starting a family and likely considering a second opinion (presumably your spouse's) of how to manage the family finances, things can get complicated and a Robo Advisor isn't able to act as an intermediary. For one thing you don't have a designated person to talk to that's really taken the time to invest in you and your story. So while they may do a great job setting you up with a diversified portfolio, your financial life has a lot more to it than just that. The majority of the reason Wall Street acts so erratically is because the general public (and even some professionals) trades on emotion. Only a human brain can react dynamically and perceptively which means going beyond the numbers. So while we agree that age and risk appetite are 2 main factors to help you get going, most Robo Advisors aren't designed examine much more than that. And the means a lot gets missed, including accounts they don't have discretion over such as your 401(k)/403(b), Pension, Checking, Savings and Business accounts, etc and of course your life beyond the accounts. So just be aware, you're basically paying for an algorithm behind a website and it's limited to what you tell it.
Defining your Goals before you invest
Often times we talk to clients who are gung-ho to take on high risk (in hopes of high returns) but once we take a look at their goals, the time frame and funds needed, they are setting themselves up to assume more risk than necessary to achieve those goals. We get it, everyone wants to have a couple fancy stocks in their portfolio so they can sound cool talking about them at their next dinner/cocktail party but having a sound, low cost, diversified portfolio that seamlessly helps them achieve their goals while minimizing their risk is WAY COOLER. If your advisor hasn't done a Lifestyle Assessment with you, you may want to ask them why. It's critically important to know what your money is working towards before setting an investment strategy. Otherwise, what's the point?
To Robo or not to robo?
We'll leave this decision up to you but as is the case with everything in life, you get what you pay for. What we'd recommend is before deciding one way or another, set up a one-time meeting to create your own Stash Plan or Lifestyle Plan so that when you are ready to make that choice, you have a solid blueprint in hand to direct your investing decisions.