The use of robo-advisors is on the rise among investors looking for an alternative way to get help with financial planning.
In fact, a report by the consulting firm A.T. Kearney predicted that robo-advisors will be managing 5.6 percent of Americans’ investment assets by 2020, up from 0.5 percent when the report was done in 2015.
Despite the intriguing name, don’t imagine that robo-advisors resemble something from a science fiction movie, with lights flashing as they dole out warnings about dangers to your portfolio.
Instead, a robo-advisor is an online wealth-management service that uses a software program to provide automated advice based on an algorithm.
Robo-advisors have their merits; clients save money, at least on the front end, because fees are usually lower, says Rick Rivera, a partner at Safeguard Investment Advisory Group (www.safeguardinvestment.com).
The required minimum investment also usually is low, which could be helpful for young investors who haven’t had time to build wealth.
“If you’re a do-it-yourselfer, it might work for you,” Rivera says. “But is it something that saves you money for the long term? Maybe not.”
Investors should weigh the advantages against the disadvantages, he says.
Examples of when robo-advisors fall short include:
- Looking at the big picture. Robo-advisors are limited to what their software is designed to handle. Human financial planners don’t have that limitation.
They can provide advice based on the bigger picture of how all of a person’s assets, tax liabilities and other factors interact and affect each other.
- Adapting to market fluctuations. Questions remain about just how well robo-advisors react to rapid market changes. Recently, when U.S. markets experienced extreme volatility because of Brexit – the United Kingdom’s vote to leave the European Union – at least one robo-advising firm halted all its trading. “People were saying this could have been negative for those trying to buy when stock prices dropped,” Rivera says.
- Helping with estate or long-term care planning. Older clients often are concerned about how to best leave wealth to their heirs through trusts or other means.
They also worry about whether they will need expensive long-term care that can eat away at their savings. These aren’t areas robo-advisors usually venture into, but human ones do. “We can say here are your options, here is what we can do to protect you,” Rivera says. “We can show them avenues that robo-advisors can’t.”
Ultimately, robo-advisors may appeal to those who have uncomplicated portfolios and can get by on general advice, but for many investors a one-size-fits-most approach doesn’t cut it, Rivera says.
“I can’t tell you how many times someone has come to me and said they heard that all life insurance is bad, or all annuities are bad, or all mutual funds are bad,” Rivera says.
“But each of those things is created for a specific purpose. Whether they are good or whether they are bad depends on your needs. That’s where human advisors can step in and help you weigh just what those needs are.”