Spokane Journal of Business

Robo advisers have role, can’t replace human touch

Costs kept low, but option provides little guidance

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Considering the degree to which technology has infiltrated daily life, it should come as no surprise that computers are starting to call the shots when it comes to personal finances. 

Robo advisers have been drawing attention in recent months as their business models are offering something with which small-time investors have had little, if any, experience in the past: investment management. Before jumping on the bandwagon, however, investors should step back and consider how well these automated managers can meet their needs.

Robo advisers are relatively new on the financial scene, and according to consulting firm A.T. Kearney, they manage only about 0.5 percent of investment assets in the U.S. By 2020, that proportion is expected to grow to 5.6 percent, or about $2 trillion. In their purist sense, robo advisers offer algorithm-based portfolio management run entirely by computer. With no financial adviser managing an account, costs to investors can be kept low. 

Getting started is as simple as getting online and answering some questions about age, work status, income and goal an exercise that produces recommendations for investment vehicles and portfolio allocation. Depending on the firm, investment options may include low-cost exchange traded funds (ETFs) or even individual stocks, and services may include rebalancing, reinvesting dividends, and tax loss harvesting. Computers take care of such adjustments automatically so that investors, who may lack the time, interest or expertise, don’t have to. 

For some individuals, robo advisers may be a perfect fit. They are certainly appealing to younger generations, who are comfortable using technology to manage various aspects of their lives. Low minimum investments mean that up-and-coming generations, which simply haven’t been in the workforce long enough to amass significant wealth, can still benefit from this type of management. Typically, such services have been limited to high net-worth investors and involve higher fees than what robo advisers levy. 

For truly passive investors, robo advisers may provide value as well. Such investors may have resources that they don’t plan to touch in the near future—or that require even minimal amounts of discipline in managing--and simply need a vehicle to help generate investment returns while managing risk. These investors have little emotional attachment to the funds and won’t be relying on them for day-to-day living or even emergency needs.

Nonetheless, any investor considering a robo adviser must do some homework. Not all robo advisers are the same, and as they should do when choosing any financial or investment adviser, consumers must research and compare associated costs, custody agreements, account types, investment options, and tax considerations. Because no financial adviser may be available to help set up an account, users must educate themselves on any ramifications of their investment decisions, particularly any tax consequences. 

While robo advisers may find a foothold in the financial industry, they will be hard pressed to overtake services with a human touch. Individuals may have multiple financial goals they wish to achieve, such as saving for retirement, a child’s education, and a new home, all at once. An adviser can help an investor develop an overall wealth management strategy and then incorporate various tools and vehicles to bring it to fruition. 

Some of life’s transitions are anticipated, and investors can be adept at planning for them. However, sometimes unexpected changes arise and can prove disastrous to a portfolio; for instance, a job loss or serious illness can put a strain on finances. Robo advisers may enable investors to put their finances on autopilot with a destination of growth, but they provide little guidance in tapping assets once needed. Working with a professional can enable investors to respond quickly to a change in circumstances and retool their investments with confidence to meet their rapidly changing needs. 

Robo advisers may take the wheel for investors, but they lack a buffer that can help investors stay on course. Given their relatively new status, robo advisers haven’t been fully tested in all market environments, and it’s difficult to predict how they might fare in a prolonged downturn or how investors might react. Financial advisers often introduce discipline to investing and guard against rash, emotional decisions based on short-term performance, decisions that could impact long-term appreciation as well as immediate tax impacts.

Investing is a highly personal endeavor. Everyone comes into the market with a unique set of circumstances, from total investable assets and appetite for risk to specific goals pertaining to cash flow, tax treatment, savings targets, gifting, and estate planning expectations. Computer algorithms simply can’t factor in such complexity, and at this point at least, they aren’t made to do so. A financial adviser provides insights that can’t be replaced by automated investing. For individuals with more intricate needs, the additional expense is well worth it for peace of mind.

It’s clear that investors have more options available to them today than ever before. Technology certainly has a place among the various tools and resources needed to plan effectively for the future. How investors choose to implement that technology should be determined after educating themselves about its capabilities as well as gaining a firm understanding of their own circumstances and goals.

Rob Blume is managing director and senior vice president of wealth management and advisory services for Spokane-based Washington Trust Bank.

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