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Real vs. Robo

From robotic arms to robotic bees (as featured in this 2014 National Geographic piece), the future looks bright for new and potentially improved ways to enhance our lives with robotics. Lately, “robo-advisors” have been capturing the fancy of the financial press, promising to take over investment decisions that have traditionally demanded human intervention. 

Will robo-advisors free us from money-making decisions that a well-programmed computer can now do just as well, or are they the financial equivalent of an un-manned Terminator? As is so often the case with powerful possibilities, the answer depends on how you incorporate the auto-action into your personalized investing. 

One Term, Many Meanings 

Because of the recent proliferation of online advice platforms, aka robo-advisors, you might think they are newly hatched. In reality, they’ve been incubating since at least the 1990s. But they’ve been picking up steam lately, with new ones being launched from nearly every corner: tech firms and fund providers, account custodians and brokerage houses, independents and insurance companies. A crowd of contenders are jostling to appeal to nearly every kind of investor there is: young and old, affluent and aspirational, adviser-assisted and self-directed. 

The buzz of competitive energy is business as usual in free markets, where there are usually far more whiz-bang products to choose from than solid solutions worth selecting. Moreover, a solution that makes sense for others may or may not make sense for you and your wealth.

Whether you’re turning to a human adviser, a robo-advisor, a do-it-yourself strategy or a combined approach, the same careful attention to investment best practices remains as important as ever, as do those same best practices. Following are a few questions to help you assess whether and how today’s robo-advisors may fit into your wealth management plans. 

What’s Under the Hood (and Who Is Behind the Wheel)? 

At the end of the day, all the investment advice in the world will be for nothing if implementation is lacking. No matter how you manage your investment portfolio, you should select your provider relationships based on their expected ability to help you achieve the highest net (after cost) returns given your unique goals and risk tolerances. Products and holdings should be chosen because they are ideal for that critical purpose, not because a provider is seeking to peddle its in-house wares to a relatively captive audience. 

Some providers have a stronger track record than others on addressing these needs, as well as accomplishing the finer details of fund management, such as incorporating evidence-based investment strategy, and allowing for disciplined rebalancing and tax-efficient investing. 

Is the Technology Tilted in Your Favor?

Those who have been texting nearly before they could talk may find online financial platforms a naturally appealing way to manage their money. If the platform has been well-designed, even those at the other end of the spectrum should be able to adapt after a reasonable learning curve. 

For technophile and technophobe alike, the tool should be a slave to your human needs, rather than the other way around. This calls for algorithms that enable relevant decision-making, not only when your life is on auto-pilot but also when it throws you those inevitable curve balls. 

Do YOU Have What It Takes?

If you were invested in 2007–2008 when the markets plummeted precipitously, were you able to keep your resolve, remain invested and participate in the subsequent recovery? Or did you lose faith and flee to cash? Your investment outcomes have so much to do with how efficiently you participate in market risks and expected returns. If you require a human to help you form a sensible investment plan and stick with it for the long haul, it’s unlikely that an automated solution will protect you when the going gets rough … protect you from yourself, that is. 

Also, if you are a seasoned investor and are considering switching to a robo-advisor platform, it’s vital to ensure that you won’t incur an onerous tax bill along the way. Even if you believe you will be able to reduce your investment fees by making a change, if you must incur steep taxable gains to do so (selling appreciated holdings to invest in the platform’s offerings), it might still be cost-prohibitive. A conversation with your tax planner is advised. 

Where Do You Stand? 

If you are just embarking on your investment journey or your means are modest, a basic, thrifty robo-advisor that meets some or all of the qualifications above may still make the most cost-effective sense for your current needs. 

Some of the latest robo-advisor solutions are designed to complement rather than replace a human investment adviser’s counsel, which may be an appropriate balance to seek when you are in the early stages of accumulating wealth. Even then, if your plans are ambitious, it might still be worthwhile to establish a solid wealth management relationship sooner than later, so you can position yourself for success from the beginning. 

In short, it’s important to assess when your investment needs reach the tipping point at which it becomes penny wise but pound foolish to avoid investing in personalized wealth management. A comprehensive wealth manager can earn his or her keep by offering you not only investment oversight but a higher, ongoing standard of care on any number of related needs such as:

  • Helping you think through challenging choices, like whether to use an unexpected windfall to pay off debt, fund your business or invest in the market
  • Planning wisely for retirement, college funding and other personal financial goals
  • Coordinating assets such as stock options or plan holdings outside of your managed accounts 
  • Considering whether important risks are being managed through targeted use of insurance
  • Connecting your investments with your estate planning and charitable intents
  • Addressing random questions such as how to handle a challenging family circumstance

What Does the Future Hold? 

Even if a robo-advisor (or robo- and human-advice combo) is a good choice for you today, you owe it to yourself to remain aware of all of the possibilities available to you as your needs evolve. A robo-provider may encourage you to turn to one of its in-house advisers as your needs grow … and that may be fine. But just as you would be unlikely to purchase a new home without surveying the market that lies beyond the block you live on, it’s in your best interests to keep your eyes open to all available opportunities, today and as the future unfolds. 

As financial adviser Josh Brown has observed in his post, “The Challenge,” “Portfolios are now free – valueless. Advice, on the other hand, is invaluable – but only if it’s delivered with meaning and when it counts.” When Tom and I started Vestory back in 2009, our goal was to find a way to provide this most elusive and indispensable component, real investing advice, to everyone. The traditional fee-only advice model works well for those with six figure or larger portfolios, but didn’t make financial sense for those with smaller accounts. These investors have been relegated to commissioned brokers.

Robo-advisory technology presented us with an extraordinary opportunity to provide a similar level of personalized investment services for smaller clients. A few years of development (and redevelopment) led us to VestoryOne, our online service that combines high-tech and high-touch. While Vestory’s traditional full-service financial planning services require a minimum portfolio of $250,000, VestoryOne allows investors to create a similar portfolio with personal guidance with only $5,000. Plus, the annual advisory fee of 0.90% is identical to Vestory’s advisory service.

Visit VestoryOne at growrighthere.com

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