In recent years, I have watched several financial institutions launch automated asset allocation tools, often claiming to revolutionize the financial planning process. These robo-advisors can be valuable tools for consumers who are just starting out on their saving and investing journey, but as these individuals grow their assets or as their financial situation becomes more complex, they would benefit from working with traditional financial advisors.
Consulting firm A.T. Kearney projected in a June study that robo-advisors will see assets under management grow to $2.2 trillion by 2020. While it is encouraging to see consumers engaged in the investment process, the rapid “robo” adoption raises concerns.
Considering the needs of young people who are just starting out with investing, it isn’t surprising that they would be drawn to the concept of robo-advisors. The reason goes beyond millennials’ obvious comfort with technology. The mutual funds and exchange-traded funds that are used in robo-advisor portfolios are usually the appropriate funds for millennials, as these funds are low-cost and provide good liquidity.
However, robo-advisor investors are also generally grouped into broad investor profiles, so it’s easy to see how this set-it-and-forget-it approach would appeal to investors, especially those who don’t want to second-guess day-to-day market swings. There are other, more dynamic approaches to portfolio management, but few retail investors are equipped to understand those distinctions or make judgment calls.
Setting aside the technical debate about portfolio management theories, which can be fairly nuanced, many young people who start their first savings accounts through robo-advisors will generally have their needs met for the first few years. Once they get married, have children, buy their first homes and accumulate wealth, they will find themselves needing more than just automated asset allocation tools. They will start to have questions about how they can pay for their children’s tuitions, set up a will, maintain their lifestyles in retirement, sell their small businesses, or support the charitable causes that are close to their hearts. Those are questions that no robot can answer.
A significant life event, such as marriage, having a child or establishing your own business marks the time to transition to a traditional advisor who can guide clients through life events as the clients seek to accumulate wealth, protect it, manage risk and plan their legacies. This is not a decision to be made lightly — nor on auto-pilot — as wealth management firms can differ quite a bit in their investment philosophies, functional specialties, and approaches to client service. Before selecting an advisor, investors should consider the following:
Understand the firm’s investment philosophy. Look for a firm with an internal investment team, rather than a firm that outsources its investment management function to a third party. Don’t be afraid to ask questions about where your money would be allocated and how your risk profile would be taken into consideration. Review any financial or economic research the firm publishes.
Research the firm’s track record. Before even meeting an advisor, it should be easy to determine what type of clients the advisor specializes in, how much money the firm manages and how much financial planning experience the team has. Much of this information is readily available on a firm’s website. Additional color can be found through a firm’s social media channels, blog posts and financial media presence. It is also important to look up if any regulatory complaints have been filed against the advisor or firm. This can easily be found on websites operated by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority.
Look for a personal fit. Investors need to be comfortable talking to their advisors, and it can be difficult to trust any expert with difficult decisions about investing and financial planning. It’s entirely appropriate to ask an advisor about their hobbies, community involvement and philanthropic interests in order to determine whether there’s a good rapport. It’s important to keep in mind that your advisor will not only be overseeing your financial well-being, but will also be a key guide through many of life’s difficult decisions. They need to earn your trust before you commit any time or money with them.
As a sports fan, I know that even the best athletes have coaches to keep them on track and help them achieve their goals. Financial planning is not so different, and the right advisor can make a measurable and enduring impact.
There are valid reasons why robo-advisors are becoming more important factors in the investment marketplace, several of which I have outlined. However valuable these tools may be, they are not designed to provide the type of holistic guidance, discipline and individually tailored support that a traditional advisor can offer to more sophisticated clients with complex wealth management needs.
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When Should Investors Switch from Robo-Advisors to Humans? originally appeared on usnews.com
