After years of development, numerous robo advisors have entered the world of investment management. Still, many investors may not fully understand exactly what robos do, or how they do it.
A robo advisor is a digital platform that uses advanced algorithms (based on various financial models and assumptions) to select and manage investments. To keep costs relatively low, portfolios are typically composed of exchange-traded funds (ETFs) and mutual funds that track market indexes.
This kind of cutting-edge technology may be especially appealing to younger investors, who are more comfortable with managing their lives on electronic devices — and who may not have as much at stake. Robos typically have low account minimums, which may help investors with minimal assets to get started.
However, some risks may not be fully understood. Robo advisors have yet to be tested by an economic downturn or times of extreme market volatility, when panicked and/or inexperienced investors may be more likely to abandon their investment strategies without a familiar voice to guide them through the storm.
Conversely, investors who utilize a financial advisor can benefit from personalized, face-to-face guidance which will increase the likelihood that they will stick to their plan in times of turmoil and increase their ability to meet their long-term goals.
The true value of a financial advisor may lie in emotional intelligence and interaction. When personal relationships are formed, advisors gain insight into each client's unique financial picture, including their priorities, pressing concerns, and psychological tendencies.
When challenges arise, a financial advisor can step in to help clients overcome impulses and biases that could prevent them from achieving their objectives.
A robo advisor may not ask the right questions or gather enough information to accurately assess the investor's needs and appetite for risk. In fact, an investor's psychological risk tolerance can be difficult to assess. Some people who describe their personality a certain way on a questionnaire may act differently under real-life scenarios.
Robo advisors can manage investment assets for less than the fees normally charged by personal financial advisors. But robo services are typically limited to portfolio management, and their reliance on ETFs and mutual funds means that investors may not have access to individual stocks and bonds, or to some types of alternative investments and strategies. A financial advisor typically has a wider range of asset classes to choose from and may be able to build a broader investment portfolio — or a more focused one — depending on the client's goals and risk profile.
What happens when an investor veers off track and is not making sufficient progress toward his or her stated financial goals? While it may be easy to ignore the recommendations of a robo advisor, it might be more difficult to disregard a trusted advisor. The prospect of regular checkups with a real person who cares about a client's future might inspire more realistic decisions about spending and saving.
A financial advisor can keep clients better informed by discussing the financial issues that matter to them, which may help give them more confidence in their decisions.
Finally, one strength of a financial advisor is the ability to listen and lend emotional support through life's transitions, some of which may call for a shift in financial strategies. Having a dedicated person to call in difficult times could help ensure that short-term issues don't derail an effective long-term strategy.
Of course, there is no assurance that working with a financial advisor will improve investment results. However, the likelihood of success- in all aspects of life- is higher when there is a formal plan in place to guide you and track progress. Our team of highly credentialed experts can offer assistance in putting a plan in place to help you realize your financial goals.
©2020 Broadridge Investor Communication Solutions, Inc.
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