In the financial world, Robo Advisors have been receiving many misplaced accolades as a method of offering sound financial advice to the average investor with little to no experience in the investing industry. The differentiating factor of the Robo Advisor when compared to the flesh-and-blood traditional advisors is that they will not overcharge you and are not solely for the rich.
The Robo Advisor is a combination of investment managers and software that utilize complex computer algorithms that manage your investments. Some are fully-automated while others have human assistance. In both models, they deliver some type of customer service to assist with the investing process. The Robo Advisor assertion is that an automated (or semi-automated) system, removes the emotion from investing allow the algorithm to make sound judgments based on trends and facts at a lower cost.
Although the Robo Advisor is receiving praise, there are 10 specific downsides to using this tool for investing.
With a Robo Advisor, you are simply an investment portfolio. As an investor, you have many personal short-term and long-term goals that you would like to achieve through investments. Your personal situation may not fit into the “cookie cutter” investing approach that is taken by Robo Advisors.
Although Robo Advisor’s offer investing with no emotion, they will not be available to talk you off the ledge when the market drops on one day. They cannot explain how investment markets work and assuage your fears. When the market is low, Robos’ will sell off your shares which will likely be a decision you will regret once the market bounces back. Selecting a Robo Advisor is similar to purchasing a house with half of a roof. You will save on roofing costs but when the weather starts to rain, there is no solace.
Only Serve One Purpose
Unlike a flesh-and-blood financial planner, Robo Advisor’s cannot integrate your taxes, estate plans and finances into single information. Also, the Robo Advisor does not have a pool of other advisors who can assist with many aspects of life that go beyond simply investing money or financial concerns. This is hugely reassuring to investors.
Falsely Bash Advisor Pricing Schedules
Although the majority of Robo Advisors have low price schedules, this is not the case for all. Similarly, not all financial advisors are expensive. In fact, there are many that have comparable fees to several of the Robo Advisors on the market. Some advisor’s charge an hourly fee for their service which can be negotiated giving you the ability to have input into the costs. The Robo Advisor does not have that price flexibility.
Falsely Claim the Little Guy Doesn’t Matter
Robo Advisor’s claim that the little guy does not matter to financial advisors who only want the sharks with a lot of money. In actuality, there are many financial advisor alternative for those who are just starting out in investing. These are marketing claims that appeal to those who are interested in investing but do not think they can afford a traditional financial advisor. Like with any service, there are a variety of options available to fit any budget.
Lack of Facetime
One of the greatest downsides to Robo Advisor’s is the lack of facetime with the advisor. With a traditional financial advisor, if you would like to sit across the desk and discuss the financial situation, ask questions, talk about the market or even your kids, you have that option. The Robo Advisor does not present that option because it completely lacks human touch. The Robos’ do not have an office where the client can setup appointments for discussion. Therefore, if you want to develop an in-person relationship with the professional handling your money, Robo Advisors are not right for you.
No Involvement in the Decisions
If you have a specific investment goal and wish to use that money toward retirement, the money would be invested differently than a goal for saving for a down payment on a house. A Robo Advisor will not be able to recognize the differing time horizons for various goals and allocate the investments accordingly.
Reading the Big Picture
With the investment market, investors begin to panic when the market sustains a long downturn. This is a situation in which a financial advisor is best to keep the investor from selling at the bottom of the market which is the worst possible time. The Robo Advisor could sell at that exact moment and lose a huge chunk of the investor’s money.
Answering Questions on your Financial Situation
As your financial investments become more complicated, a flesh-and-blood financial planner can answer all of the questions needed with regards to retirement or long-term care insurance. The Robo Advisor cannot answer any of these questions and they were solely created to focus on market algorithms and investments.
Investment Management Box
All Robo Advisors adhere to strict algorithms that fall into an investment management box. In many instances, paying off credit card debt is more important to complete prior to investing than simply jumping right into the market with that money. Robo Advisors are not able to evaluate the situation and catch certain requirements prior to investing the money into the market. While the investment management box is beneficial in many instances, successful investing takes more than just approach. Knowing the history and having experience in the market is much more valuable than a robot computing algorithms.
Robo Advisors are best suited for those who need a less hand-on investing approach and do not have difficulty navigating online tools. However, for those who enjoy the facetime experience, want to be involved in their investing and make decisions for themselves with the assistance of a financial professional, Robo Advisors are not the best choice for you. While many are flocking to Robo Advisors because they can be less expensive and more hands off, there will always be a need for financial planners and advisors to provide the human touch to investing that cannot be replicated through automation.