Should I Use a Robo-Advisor for Wealth Management?

Up until about 10 years ago, robo-advisors were only available to financial services firms and advisors. However, the market crash of 2008 changed the dynamics of how investors viewed available resources for retirement and long-term financial planning. More importantly—to the financial advisory industry at least—it changed what many were willing to pay to receive guidance on money management and investing. 

People began to look for better options after so many were heavily impacted by the losses experienced from the Great Recession. Risk tolerance decreased and investors shifted more towards wealth preservation models which contained target-date funds and a desire for index funds, and passive ETFs grew. From there, new automated products appeared on the market which gave investors more flexibility to allocate and monitor their own investment portfolios. Financial engineers developed algorithms that grew increasingly sophisticated and could manage an entire portfolio of asset classes. With all of this happening and the online advisor services industry growing, you may find yourself asking: should I use robo-advisor?  

What Style of Investors Do Robo-Advisors Suit?

Nowadays, there are many automated investment advisor platforms available on the market for all styles and purposes of investing. Some services operate on modern portfolio theory (MPT) and mean-variance rebalancing.

A new investor begins with a series of questions that will determine:

• Risk Tolerance
• Asset Classes
• Investment Goals
• Planning duration

Once you have completed the questionnaire, the platform will offer a complete profile of the style of investor you happen to be. You may be:

• Risk-averse
• Moderate
• Balanced
• Aggressive

These automated services are a good way for new investors to get a general portrait of what trends and strategies may be best suited to their particular style of investing—but what about factors beyond this initial profile?

Money Matters: Fees for Automated Services

As an investor, you have many questions. Developers have worked hard to approximate the quality of service you would receive if you were sitting down with an advisor in person, but the question of fees can be a tricky one when the advisor is a computer. Questions you should ask include: Is there a tiered fee structure based on the total combined value of your investments managed by the platform? And, what is the minimum to open an account?

Fees using a robo-advisor are generally less than hiring your own financial advisor. Advisors may charge by the hour or a percentage of the total assets under management (AUM). The average fee is around 1% of AUM. Reputable robo-advisors range from near 0% to 0.90%.

So, you may be wondering, should I use a robo-advisor just to save money alone? You could. And, there is customer service support available for the higher-rated automated investment advisors. However, a robo-advisor will not prevent you from logging-in and making impulse purchases or sells at the snap of a finger. Investment advisors are trained to help walk their clients through “bear” market conditions or surprise devaluations of stocks. There is also something noteworthy to be stated about the personal touch that comes with planning for life changes with an experienced advisor.

What About a Wealth Advisor Hybrid?

Fortunately, advisors do recognize the value in providing a digital platform for clients to log into and view their investments at leisure. A hybrid of robo-client-advisory service enables financial advisors to offer lower fees. The investing client chooses their own assets in this scenario, which can be time-consuming, but as a result, the advisor has more time with the client for finance and estate planning and tax management concerns. While this will require some additional time and research on the part of the investor, and can provide a great way to help lower fees.

Single Market- and Robo-Advisor by Sector

Newer automated investment management services offer a single market or individual sector product services. Let’s take the derivates markets for example. You can find a robo-advisor that will allow you to buy, sell, and manage your options contracts all in one place. More investors are becoming interested in socially responsible investing. This platform offers an array of products and portfolio allocation that caters to that style of investor.

The Value of a Human Advisor

Robo-advisor services have put visibility into the hands of investors. Consequently, it’s important to harness the algorithms they use to model investment scenarios for clients. They are based on years of economic research and have grown into powerful tools over the years. However, when it comes to the need for tactical targets and rebalancing based on current market conditions, they are limited. Combining the forces of powerful computing with the intuition and experience of human advisors is a great way to leverage all the available tools that you have at your disposal, and to ensure that you are investing in the smartest and most efficient way.

Advisors from a firm like SD Mayer have years of experience helping families and individuals build wealth, planning for their retirement, estate, and kids’ college. Their advisors take a holistic approach to financial planning that robo-advisors alone simply cannot provide. They work with a comprehensive approach to help you achieve success. Contact us today to get started on your wealth management plan.

Image Credit | Montri Nipitvittaya | Shutterstock