You’ve probably seen the television commercials touting the latest craze in our technology-obsessed world: automated investment management. Talking babies, celebrity pitchmen, computer screens speaking with a slight British accent – you’ve seen all of these and more. It’s a trend that’s been several years in the making, suggesting that it’s the human element in investing that isn’t trustworthy and that each person can best protect his own interests by taking matters into hand.
The truth, however, is that there is room in the financial future for both automated and human investment advisers; each has strengths that can help maximize investment strategies. It all depends on where you are in your financial journey, what choices you are facing, what possibilities you desire, and just how comfortable you are with investing in general.
What is automated investment management – also known as a Robo-Adviser?
Some of the financial industry’s bigger players have taken the plunge into algorithm-ruled investing, and many people are intrigued. Automated investment management relies on a computer algorithm to make so-called “intelligent” investment decisions. Using a computer algorithm to analyze investment options takes some of the mystery out of investing, and makes people feel empowered and smart.
In fact, automated investment tools are nothing new – financial advisers have used them for many years to help them craft investment plans for their clients. But making these tools available to people outside the investment industry opens up a whole new market from which investment firms can attract business. These types of services appeal to people with a smaller amount to invest, who are often beginners in saving for their financial future. This is encouraging to many in the investment field, including those of us at Payne Wealth Partners, because it allows people who wouldn’t otherwise consider investing to begin much sooner than they might have before.
Robo-Advisers: Limited By Technology
If you’re just starting out in investing, automated investment management allows you to take a small sum – say, $5,000 – and begin growing your money. This is appealing to young people1, who often have the perception that it takes a large sum of money to begin investing, and who may not have the minimum required assets to merit working with a financial advising firm.
But automated investment management has its limitations. Robo-advisers are typically limited to portfolio management – that is, the balance of objectives, investments, and risk management that is unique to that account. Robo-advisers cannot handle tax issues, life transitions like a new job offer or loss of income due to downsizing, or legislation changes, which are more personal aspects of wealth planning, requiring a human touch. What’s more, automated investment advisers can’t advise and react to changing market conditions on their own – managing your portfolio requires you to be proactive, stay in tune to the financial climate, and trigger changes on your own, placing the risk of emotion making it into your decisions. While you may enjoy having control over your financial investments, using automated investment management tools is only a starting point for the rest of your financial life.
The Human Factor
Wealth planning has many facets; not only do you want to create wealth, but you want to protect that wealth so that you can ultimately match those resources to your future life vision. Doing so requires planning, and that planning is dependent upon human involvement – no computer algorithm is going to understand your goals, lifestyle, challenges, and overall personal characteristics.
In our case and with firms similar to ours, a financial adviser has spent many years learning his or her trade, including earning a degree from an accredited college or university, time spent in internships, and post-graduate work in earning a higher degree or certification, all to develop their skills in order to serve the clients’ best interest. This in-depth study of finance provides an extensive knowledge base to draw from when advising clients, and it is this educational background that a robo-adviser’s algorithm attempts to replicate. But a human financial adviser has one quality that a computer algorithm will never have: the ability to listen to a client and take into consideration that client’s goals, choices, and challenges for his or her financial future. A human adviser can take a look at a down market and suggest that it would be a good time for you to convert money into a Roth; when the market goes back up, so, potentially, does your Roth. A robo-adviser can’t provide that type of valuable personal guidance.
Working With a Fee-Only Adviser
Of all the types of financial advising available to you as an investor, working with a fee-only adviser2 is perhaps the best option for wealth management. Fee-only advisers are required to place YOUR best interest first and are compensated solely for the advice they provide; they do not receive commissions for the investments sold to clients. This model of compensation reassures that a client will receive solid, unbiased investment advice and asset management based upon the client’s financial needs and goals.
No matter what your investment strategy may be, you might be tempted to dabble with robo-advisers just to see how well you can do on your own. One of the advantages of this exercise is that it gives you an education in investing that you may not get anywhere else. Automated investment management can be interesting and even enjoyable, just so long as you don’t put all your investing eggs in one basket. Bring a human financial adviser into the conversation early on, so that you can maximize your investments in a way that will benefit your life in the long term. A human financial adviser can enhance your efforts in using a robo-adviser, and at Payne Wealth Partners we welcome exploration of robo-advising together.
Published: December 2, 2015
Author: Alex Jenison
Phone: (812) 602-6310
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The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.