If you browse the Wall Street Journal, Fox Business or CNBC websites, you’ll likely see ads for robo-advisors. Robo-advisors generally provide portfolio management advice with minimal human interaction. They are attractive because they offer low fees, low investment minimums and the “same investment advice provided to multi-million dollar clients.” These companies’ services cost considerably less than traditional brokers and advisors; however, you have to ask, “At what price?”
The gist is robo-advisors develop an investment formula, then model portfolios are created using the formula and packaged to cater to a variety of risk perspectives. The formulas are based on modern portfolio theory, which is a calculation that attempts to maximize expected return for a given amount of risk. Portfolios can then be enhanced with a particular focus or goal. Are you interested in dividends? There is a portfolio for that. Tax efficiency? There is a portfolio for that too. If you don’t know what you want, some robo-advisors offer a risk tolerance scale to help direct you to one of their pre-designed stock or exchange-traded fund portfolios.
So, you’re basically getting the same advice cheaper because you’re not talking to a person? Sort of. While robo-advisors offer a solution to investment selection, they do not offer any financial planning or ongoing management. Because the formulas or modeling software robo-advisors use are often the same formulas used by traditional financial advisors, these may be good for a small investor who does not have an investment philosophy. Many robo-advisors do not have a minimum investment amount, so for the couple hundred dollars you can invest, you’re getting theoretical, generic guidance. Keep in mind you can do nearly the same by buying an index or exchange-traded fund.
For those who need financial planning, are approaching retirement or have retired, robo-advisors are unable to help them determine whether or not they are able to reach their goals and objectives. A trusted financial advisor gives guidance beyond investment selection. When you hire a professional, you should work with someone who monitors the overall picture of your financial life. They can give recommendations about long-term life decisions, and help make sure all financial matters work together efficiently. Part of the advisor-investor relationship is the attention given to estate planning and insurance issues or the unique understanding of complicated cash flow difficulties and tax circumstances. A professional will also be able to tailor your portfolio and financial plan to your situation.
Robo-advisors are not inherently bad, but investors need to know what they are getting for their money. Anyone can buy an off-the-shelf software to complete and file tax returns based on input data. Robo-advisors are much the same. You input a certain amount of data points regarding your investment style and risk tolerances, and the software suggests a recommended portfolio. What neither a tax or investment software can do is recommend how to change your data points to achieve different and sometimes better results.
If you have questions regarding how much more a financial advisor can do for you beyond portfolio management, experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
