Robo or Real?

Robo-advisor is a term I come across multiple times a day and there are no shortage of opinion on whether they’re an amazing cost saving tool everyone should take advantage of or impersonal imposters. My take is that both those things can be true and it completely depends on the situation. Let’s explore what to consider when reviewing your robo and real investment options.

FIRST, consider the relationship you want vs what you already have. Is the relationship about investments, planning, accountability, or all these things?

Let’s make it clear that Robos are the financial industry’s version of robots that are making some advisors obsolete. Most industries have dealt with this evolution of technology, which is why the USA is now known for service rather than product. Now that it’s reached the financial services sector the Robos are met with no shortage of reaction from those most threatened and benefited.

The idea of Robos is terrifying to many advisors that hang their hat on servicing a large volume of any and all types of clients. Why? These human advisors provide no additional value to the client beyond investment management and are charging significantly more than a Robo. These advisors aren’t specialized, don’t offer planning or guidance, and have a very streamlined investment service that allows them to profitably scale their practice which is more a benefit to them rather than you.

If you’re unsure if you’re in this type of relationship here’s what to consider:

  • You only meet 1x/year if you remember to schedule it.
  • They aren’t fiduciaries. What they’re required to do is make decisions based on “suitability.” As Michael Kitces says, just because the suit fits doesn’t mean it looks good on you. That’s essentially the difference between “suitability” and a fiduciary working in your best interest.
  • The meeting is small chat about the weather, performance, changes made to the portfolio throughout the year, and buying or switching a whole life or an annuity policy.
  • The meeting is NOT answering your questions about affording retirement, specifically how short-term goals impact the big picture, managing a budget, estate planning, elder care issues for yourself or a parent, taxes, and asset protection.
  • You’ve asked for these services and they provided you with “financial solutions” to purchase in the form of whole life and annuities. They earn a commission on these “suitable” products.
  • Fees are automatically drafted out of your investment account or policy. This approach makes it feel like you’re not paying anything for their service but in reality, they’ve just saved you time from writing out a check.

If this situation looks familiar, what should you do? A Robo-Advisor for the investment management piece could very well be your answer. If you can continue to stomach being one client in a sea of many with little to no planning guidance, you can save a bundle working with a Robo and not be sold on “financial solutions” in the form of product., for example, starts at 0.25% if you work with them directly. They have different levels of service options for those wanting to regularly discuss the portfolio. A typical human advisor charges 1.0%, and likely more for accounts under $500,000 (ask your advisor for a reminder of what you’re paying for comparison purposes). Robos also typically create low-cost portfolios, because remember there are 2 levels of fees to consider, the cost of the advisor and the internal cost of the portfolio itself. Robos rely heavily on ETFs that have lower fees compared to traditional mutual fund options. Mutual funds sometimes also provide kick-backs to human advisors in the form of loads and 12b-1 fees. That’s something else to ask about. Therefore, if all you’re looking for is basic investment management on a modest portfolio, a Robo would worth considering.

The one thing that isn’t solved here is the lack of guidance and planning that’s typically reserved for those in the high-net-worth category. If planning services are necessary to help you manage goals and make sound decisions in regards to everyday issues, then finding a real-life advisor that offers planning services is necessary. Planning can be delivered in a number of ways. Advisors may approach planning by charging an increased percentage on managed assets or quote a project, membership and/or hourly fee. If planning can be separated from investments, consider utilizing a low-cost Robo for investments and using the savings to hire a human for planning.

SECOND, your attitude on the market is extremely important in deciding between Robo and real.  If the Coronavirus market plunge had you in a tizzy a Robo won’t slap your hand away from the mouse when you’re in panic mode liquidating your portfolio.  Your advisor could very well pay for him/herself in times of market uncertainty if you’re the skid-dish type. Buy low, sell high is easier said than done, and most people fail miserably at the concept despite their best efforts. Even if you don’t trade on emotion, are you sleeping well at night, or are you melting down about your inevitable financial ruin? It’s NOT worth the savings in fees if you’re emotionally connected to your assets in such a way that you’re potentially self-destructive. Pay someone to be the gatekeeper between you and your money, just like you pay a trainer to lure you to the gym. And FYI – I’ve called robo-advisor services during market downturns just to get a sense of their service and many don’t answer. You’ll simply get a message about increased call volumes and to try again another time. 

THIRD, you have a portfolio that warrants a little more excitement and attention than a Robo can provide you. Sure a Robo is great for someone that doesn’t pay attention to market volatility and has +/- $250,000.  But what if you’re in the millions? Are index funds really making you feel like you’re applying your wealth in the best way possible? If not, it’s time to see an advisor that can bring some more exciting options to the table. The good news is at that level of wealth the fee differential between Robo and real begins to narrow, finding a fiduciary is easier, and you’re more likely to meet and afford planning service minimums. Not to mention that investment managers can navigate tax efficiencies much better than robos who typically want you to liquidate any existing positions in order to conform to their models. If you have an appreciated trust or brokerage account – that’s a nightmare of a tax bill!