Robo-Advisors are Great! (at being robots)
I started in the financial advising business in 1998. Windows ’95 was still a baby and the internet had not yet made it’s mark (most people still called it “the information super highway”…not “the internet”). I remember vividly how people were predicting that this new way of communicating would replace financial advisors. This struck me as pretty bad news since I was a week into my new career. There were several old guys in my firm that assured me that they were irreplaceable and therefore I had nothing to worry about.
Now here we are in 2016 and if you haven’t yet heard the term “Robo Advisor” it’s because your current financial advisor probably put a keystroke blocker on your phone that doesn’t allow you to Google it! Why would they do that? Because your human advisor doesn’t understand value and is nervous about being replaced.
Here is how a Robo Advisor works (with some simplification on my part):
1. You fill out a risk questionnaire on your phone.
2. The algorithm (robot) sets up your portfolio.
3. The robot automatically rebalances your portfolio.
4. You get alerts and advice generated by the robot.
5. All for 1/10th of the price of a human advisor.
Robo Advisors are great….but only if you are a robot too. Wait…what??? Yep you read that last part right. Robo advising works great as long as you possess no human emotions whatsoever. Investors fail not because they don’t have a good portfolio of stocks (although I’ve seen some pretty bad ones out there), the reason people fail is because they get scared and do the exact wrong thing at the exact wrong time. Here are some examples:
You get nervous because the market is too high.
You get nervous when the market drops.
You get nervous when Oil is high.
You get nervous when Oil is low.
You get nervous when China is booming.
You get nervous when China is busting.
See a trend? Investors are NEVER happy. Human beings are wired to move away from pain and the stock market is not a comfy, cozy place. Robo Advisors are great at the technical, but they don’t have the “click here to stop feeling emotions” button. That’s what I am for my clients. I’m the “nope, we aren’t making that mistake” button.
Robo Advisors come at a lower price tag than a human advisor… But a strong and experienced human advisor comes with that one special button a Robot can’t have. The human has the “I’ve been to this rodeo before and we aren’t selling your stocks” button. That button is worth A LOT of money to you and your family. So until Humans become Robots or Robots become Humans, Robo Advising is not a replacement to your Human Advisor.