From driving our cars to cleaning our houses; you may not realize it, but the future of robot assistance is already upon us. But what about helping us prepare for retirement? Here’s how to know when you should use a robo advisor or a human financial advisor.
Americans are investing in greater numbers than ever before. In the first half of 2021, new brokerage accounts opened by individual investors have already roughly matched the total created throughout 2020, hitting more than 10 million, according to estimates from JMP Securities. And now many of these investors are turning to automated investing with robo advisors, which saw a surge in new account openings in the early months of the pandemic.
What is a Robo Advisor?
A robo advisor is a digital platform that provides automated investing services (which are usually algorithm-driven). While some provide human guidance as a supplementary service, the objective is to take the human emotion out of investing decisions; taking a numbers-driven approach to help create an investment strategy by looking at an investor’s risk tolerance and financial goals.
The generic pros of robo-advisors are that they usually give you a low-cost, hands-off approach with often no minimum balance requirements. Robo Advisors are also infamous because they tend to follow indexed strategies which are best suited for some investors.
The generic cons of Robo Advisors are that they don’t offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.
Here’s a look at how Johnson Wealth & Income Management can help you deeper navigate the pros and cons of Robo Advisors.
The Pros of Robo Advisors
A Hybrid Approach
Probably the best way to ease into the prospect of using a robo advisor is to access one through a financial advisor.
This hybrid approach is becoming common for traditional financial planning practices to have robo advisors create various portfolios of index fund ETFs, according to typical risk profiles from conservative to aggressive. This takes the task of choosing assets off their hands, so that the financial advisor may spend more time with their clients addressing individual tax, estate, and financial planning issues, customized to their specific needs. If paired with a human advisor, this trend could give the consumer an opportunity for lower-cost investment management while retaining the personal touch of an advisor.
Robo-Advisors Aren’t One-Size-Fits-All
There are robo advisors for different types of clients. If your primary concern is rock-bottom fees, there are several robo-advisors with broadly diversified low-fee exchange traded fund portfolios. Some robo-advisors claim rebalancing and tax-loss harvesting in their arsenal.
Beyond these automatic features, you may want a robo-advisor that offers more comprehensive financial planning. These robo-advisors may get your financial house in order by looking at your spending, saving and other aspects of your financial life, with investing as part of the picture. For example, you may be able to link your financial accounts with the robo-advisor and get a full “real time” view of your finances, where your money is going and where it could go instead.
Why does anyone ever turn to automation rather than paying a human to do it? Simple: It costs less. Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations.
The Cons of Robo Advisors
No Face-to-Face Meetings
If you’re someone that wants a relationship with your financial advisor, then most robo-advisors aren’t for you. Robo Advisors don’t have an office where a client walks in and talks directly to an advisor. This type of personal contact is relegated to the traditional financial advisory models.
You’re more than just an investment portfolio. You have many goals, both for the near and long term. While many robo advisors now allow you to set and edit your goals using their financial planning software, you also have money-related issues and concerns that may benefit from a chat with a human being.
Robo Advisors won’t talk you off the ledge after a significant market drop, whereas human financial advisors are there to ease your fears and explain how the investment markets work. A financial planner works to help integrate your finances, taxes, and estate plans. What’s more, your financial advisor may have a diverse pool of other professionals to help with many specific aspects of life beyond just “money” concerns.
Noone to Manage Emotional Decisions
As it has done in recent weeks, when the market drops by a large percentage rapidly, some investors panic. Just because your robo advisor won’t start panic-selling, what’s to stop you from making rash decisions? With a human advisor, you call them up in a panic and they can help reassure you. As your Fiduciary, your advisor must put your best interest above their own. A financial advisor who’s a fiduciary has an ethical duty to recommend the best investments for you. A robot simply cannot provide the same principels.
Limited Flexibility & Personalization
Robo advisors are designed for the masses. They base their decisions on investing profiles for people like you — not you personally. When you encounter a major life-event (inheriting money, buying a house, getting a divorce etc), careful planning, adjusting and taking thoughtful action needs to occur in order to help ensure a positive outcome. Over time, many discussions are required during this process, and having a human professional helps you adjust and adapt as needed – and can make all the difference in the world in your success. Robo advisors on the other hand, operate solely on algorithms, making them inherently less flexible and personalized.
When considering ways to manage your investments, robo advisors may be able to help retirees maximize their nest egg through smart investing. When choosing between a robo advisor and human financial advisor, it isn’t necessarily a question of one or the other. Financial advisors can use robo advisors to enhance their practice by leaning into technology while making it more powerful through the human touch. By working together, robo advisors and financial advisors can each focus on what they do best.
While there are several positive points to consider when it comes to using robo advisors, it’s always best to do your research beforehand and contact your trusted advisor at Johnson Wealth Income Management about your concerns.
All written content on this site is for informational purposes only. Opinions expressed herein are solely those of Johnson Wealth & Income Management and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. Investing involves risk. There is always the potential of losing money when you invest in securities. Asset allocation, diversification and rebalancing do not ensure a profit or help protect against loss in declining markets. All information and ideas should be discussed in detail with your individual advisor prior to implementation. The presence of this website, and the material contained within, shall in no way be construed or interpreted as a solicitation or recommendation for the purchase or sale of any security or investment strategy. In addition, the presence of this website should not be interpreted as a solicitation for Investment Advisory Services to any residents of states where otherwise legally permitted to conduct business. Fee-based financial planning and Investment Advisory Services are offered by Sound Income Strategies, LLC, an SEC Registered Investment Advisory firm. Johnson Wealth & Income Management and Sound Income Strategies LLC are not associated entities. Johnson Wealth & Income Management is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities. © 2021 Sound Income Strategies.