The Dangers of Robo-Advisors
Automation using technology can be a great thing. In manufacturing, packaging and even in our daily lives, automation decreases the time we have to spend completing tasks and often increases both accuracy and uniformity. ATMs save us the time of having to go into the bank to withdraw money. Emails allow us to send messages immediately instead of waiting for the post office to deliver it. And soon, we won’t even have to drive our cars ourselves!
But not every activity or service should be automated. In the past few years, many companies have started offering automated financial advice to clients through systems often referred to as robo-advisors. While the marketing campaigns of these robo-advisor companies let you know about the convenience of automation in your financial life, they fall short at warning you of the potential dangers.
How Robo-Advisors Work
When you open an account with a robo-advisor firm, you’ll be given an electronic assessment that helps identify your financial goals and needs. From this data, the company’s software determines an appropriate asset allocation model. Over the years, the robo-advisor will generally suggest rebalancing based on shifts within the market and your portfolio.
The Robo-Advisor Drawback
Investors who are drawn to a DIY approach to investing, but who don’t want to research various investments themselves, often think the robo-advisor route is ideal. But investing and financial planning are complex tasks that require more than a simple electronic questionnaire to get right. Only a human can figure out all the right questions to ask during a meeting in order to discover your essential goals, ideals and potential financial limitations. Without this person-to-person interaction, you could easily end up in the wrong investments for your needs, risk tolerance and timeline. A human advisor can get to the heart of who you are and how your vision for your future should affect your financial decisions.
Another reason robo-advisors can be dangerous is that no robot is able to handle the intricate decision of whether you should buy, sell or hold an individual position in your portfolio. They would need to consider too many variables, such as whether a stock is at a temporary low due to some recent bad news, whether a purchase could make you run afoul of wash-sale rules, and how a transaction may affect your tax situation.
Most importantly, the robo-advisor lacks the human touch that can help investors get through difficult situations. They aren’t there to hold your hand when the market takes a dive and keep you from panicking and selling your shares when prices are low. They aren’t there to tell you what steps you need to take when preparing for huge life changes such as marriage, divorce, or a new child. Or to help walk you through the overwhelming burden of losing a spouse.
There is no replacement for the understanding and analytical powers of another human being. When you’re making financial plans, let a human advisor from Kramer Wealth Managers help get you on your WealthPath and help to keep you there.