Are These Robots Gonna Make Me Rich?
Craig Donofrio — Break It Down
Who do you want investing your money? A person? A robot? A bionic man? OK, robo-advisers aren’t really cyborgs, but these new methods of investing using algorithms increasingly look like the future of money management.
Robo-advisers are automated online investment services offered by a financial company. The name is actually kind of a misnomer: Robo-advisers aren’t really providing advice, nor are they robots. Rather than meet with a financial adviser in person, you answer a questionnaire on the advising firm’s website or app—stuff like your risk tolerance, age, and financial goals—and the algorithm spits out a customized investment portfolio (often built around exchanged-traded funds) based off that information. Then, it’s basically hands off. The robo-adviser manages your stocks and bonds for you, rebalancing here and there based on an algorithm. The newest kid on the block, hybrid advisers, add a more personal touch—your technology-developed portfolio plus some human assistance.
Exactly when robo-advisers started is difficult to specify, but their investment assets have grown exponentially since 2012 and show no signs of slowing down. Citing a report by MyPrivateBanking, Business Insider predicts hybrid and robo-advisers will hold about 10 percent of investable wealth by 2025 in their cold, metal hands.
While life planning in your underwear is certainly a draw, most people use robo-advisers because they’re relatively cheap. “It’s all algorithm, and if you’re not interacting with someone, the cost is going to be pretty low,” says Eric Hutchinson, a fiduciary located in Little Rock, Arkansas, and author of The Financial Briefing: Answers to Life’s Most Important Money Questions.
For one thing, robos and hybrids often have lower fund minimums—or none at all. For instance, a robo-adviser may have an account minimum of $500; to get personal advice from one of the major financial firms, your account may need to have at least $50,000 under management.
Also, the fees tacked onto investments can be lower using the algorithm-based services. On the whole, the yearly lump sum for robo-advisers tends to be less than what’s charged by traditional advisers. For example, a 1 percent annual management fee is pretty typical for a regular adviser, while 0.25 percent to 0.5 percent is more common for robo-adviser services.
Like shopping online, you don’t have to leave your house to use a robo-adviser. Also like shopping online, customer service can be limited at best. With robo-advisers, finding the right firm to use is key. Financial professionals familiar with robo-advisers say that the best ones are far from hands-off, frequently soliciting client feedback to improve their advice and portfolio options. On the other hand, with some firms, you could be on your own once the algorithm has generated portfolio suggestions for you. Because of that advise ’em and street ’em mentality potential, Hutchinson has some concerns about those questionnaires.
“In some cases, people don’t understand certain terms well enough to know how to answer them, so they answer as best they can—but the computer doesn’t care. It’s, ‘you scored a six here, a nine there; here, you get package ABC,” says Hutchinson.
If you don’t understand the questions or incorrectly assess your financial priorities or risk tolerance, you could end up with a portfolio that doesn’t align with your goals. However, hybrid adviser services could change that—if you have the cash.
Once you know what a robo-adviser is, a hybrid adviser sounds like the perfect melding of man and machine. An IRL adviser with the best market evaluation technology at her fingertips and one who is always only one smartphone tap away from personalized advice? Win, win!
What you probably aren’t picturing is a call center stocked with employees chatting and typing away in cubicles under rows of florescent lights while customers pile up in the call-waiting queue—but that could be what you get.
“You might get Craig, Fred, or Susie” when you call, explains Hutchinson. “You might get Craig this time and Fred the other.” Capital One’s hybrid adviser program, for example, has no minimum investment requirement to get some general advice from a call center. Some companies will provide you with a specific adviser—Vanguard’s hybrid program does, but only if you have $500,000 to invest. Customers with smaller accounts receive 1-800 number to call.
But that isn't necessarily a bad thing. Hybrids may be the perfect melding of man and machine, or they may be the perfect way for a firm to get more assets under management until a pure robo-adviser model becomes profitable, giving you just enough personal attention to get your investment portfolio moving.
If you have pretty straightforward investment goals and want a bit of hand-holding, you may not need the personal touch of regular visits to a certified financial adviser, and a hybrid adviser might work well. But if your life is a bit more complicated, the nuanced understanding of an experienced financial planner could pay off in the long run.
For example, let’s say you have two kids. One is well-off, the other has special needs, and you want to know how to ensure they’re financially comfortable in the event of your death. A call-center hybrid adviser “may not have the exposure and experience, or the contacts for the right attorney necessary to write a special needs trust, for example,” says Hutchinson. You’re paying for that expertise which “carves out investments to fit the circumstances.”
Sometimes, good advice can be extremely valuable. After the 2008 crash, Hutchinson’s 77-year-old client called in a panic. Hutchinson sat him down, looked at his portfolio, and realized while the client’s stocks were down 23 percent, he had almost seven years of cash to weather the storm. Having this in person advice gave the client a clear financial path. “That conversation would have never happened with a robo-adviser,” he claims.
Now, that’s not to say there’s no upside with robo-advisers or hybrid advisers. If you’ve got a clear picture of your financial goals and investment priorities, and feel confident you can keep an eye on your portfolio without panicking during market dips, then the reduced fees for these advisers could be well worth the savings. And if this technology can make prudent investing available to more people by lowering the required assets, fees, and minimums, all the better.
“There’s nothing at all wrong with robo-advisers, there’s nothing perfect with the human adviser. Really, what you’re paying for [with human advisers] is expertise and to help you make decisions to do the right things at the right time. Basically, for them to be there and hold your hand when you need it,” says Hutchinson. On the other hand--just as there are sophisticated robo-advisers--there are lackluster human financial advisers who function as sales people first, and true advisers second. The key is comparing your options and finding one you trust.
And the more firms pick up robo- and hybrid adviser services, the more likely they are to evolve into something we haven’t even seen yet.