We’ve all now probably heard of the rise of Robos…we experience it on a daily basis. The amount that technology, computers, and the proverbial robot have taken over our lives is undeniable.
So, the big question is, can computers replace humans and give sound financial advice? The answer will differ for everyone as there is no one size fits all answer in financial planning.
Let’s first start with a couple of definitions as it relates to these so-called robo-advisors and how they differ from the traditional brick and mortar financial advisory firms staffed by, well, humans.
Robo-Advisor definition: An online service provider that provides automated low-cost investment management with limited human contact.
Financial Advisor definition: Located in an office building near you. Provides personal advice and services with an emphasis on human contact and relationships.
So what are some things that a robo-advisor can actually do for you and how does it work? Well, it’s simple (as long as you are somewhat computer savvy). You start by answering three basic questions; how old you are, retired or not, and annual income. From those three questions, you are given goals which include safety net savings, retirement, and other savings. You are also then told the amount that should be in each of those buckets and how they should be invested, again, based on the three questions answered. Once you get that far, you must sign up for an account. It will ask you for some additional personal information, including your social security number, which is said to be encrypted.
After nearly 10 minutes of answering a few personal questions, you have an account and are well on your way to investing towards your goals. Though keep in mind what these firms are offering is not unique. All of the robo-advisor sites base their automated investment guidance using Modern Portfolio Theory, Efficient Market Hypothesis and a series of questions to determine your risk profile. Automation of this type of service and low human contact has enabled robos to provide low-cost advisory services. But, at what expense, really?
There are plenty of other retirement calculators available online, but navigating them all as it relates to your own personal life can be tricky. And, when you are logged in to your robo site, you certainly aren’t getting much planning advice outside of investing. It may offer a social security filing strategy option, or allow you to eliminate social security all together. It doesn’t allow you to evaluate the investment choices in your company’s 401(k) plan; it just allows you to add it to your overall net worth. What if you need a recommendation on which bucket of money to withdraw funds from, if needed? Or advice on helping your children financially? What happens when you need help determining if Long Term Care insurance is a prudent investment? Or how to take advantage of employer benefits, how to talk to children about money, how to navigate a successful transition into retirement?
That’s where the human comes in.
Like most anything, one size does not fit all when it comes to financial advice. And in reality, none of us are walking, talking algorithms. The robo-advisor space could potentially fill the need of most beginner investors and investors with an uncomplicated financial life. But for most of us, things are more complicated. And on top of all the different puzzle pieces in one’s financial life, emotion plays a large if not the most significant role in your financial success long term. There is not really an algorithm to help investors get through periods of market volatility. A lot of investing and goal planning is emotionally based as it relates to the markets. In other words, a financial planner can help provide more coaching through rough patches in the markets or even life.
So, can computers replace humans? It all depends on what you are looking for. And, there may be a space in your life for both. But as your needs change and your life evolves, you be the judge of who you want walking beside you, a human, or a computer.
Submitted by Sterling Retirement Resources, Inc. on July 7th, 2015