Should You Entrust Your Wealth To A Robo-Advisor?


In our digital age, everything from the analog era seems ripe for disruption. Have a process that has worked seamlessly for centuries? Doesn't matter. Some young tech genius is inevitably laboring to render it obsolete.

The world of investing is hardly immune. And that explains the rise of the robo-advisor. 

Haven't keeping up with the latest investment trends? Here's a quick review. For years, many thought managed investments required a personal touch. Advice from an expert who knows you and your finances.

Robo-advisors offer an entirely new deal -- automated money management at a very low cost. There's no human touch. No face-to-face talks. Instead, robo-advisors offer you algorithms. Automated advice expertly crafted to offer you the ideal asset allocation.

So what's the benefit?

Glad you asked. In two words: low fees. Robo-advisors make investing cheaper and more convenient. They offer an online interface that's accessible 24/7. They offer transparency. They can also re-balance your portfolio. Do you want detailed performance reports and advice at 2 a.m.? Not a problem. Your robo-advisor is always ready.

Much like traditional advisors, the services offered via automated investment vary widely. Some offer investment management. Others focus on financial planning. Some do a bit of both.

As younger people age and become wealthier, robo-advisory is growing more popular. A recent study by A.T. Kearney shows one out of five people with a checking account are familiar with robo-advisors. Adoption, however, has a long way to go. Only about three-percent are actually using the technology.

Still, given the Millennial desire for all things efficient and digital, the future for robo-advisors seems rosy. Yet there's always a catch, isn't there?

Are there drawbacks to robo-advising?

Absolutely. You didn't think all that cost-saving and efficiency came without a cost? Robo-advising has many great elements. It also has a few flies in the ointment. First, the advice you'll receive is dependent on information you provide. If the data is faulty, the advice will suffer. Did you make a typo? That could have ruinous effects. 

Robo-advisors aren't perfect. They may ask questions that are ill-defined. Or confusing. Or ambiguous. Or too general. The advisory element is based on your answers. That means any communication issue could lead to problems.

Your robo-advisor is only as good as its programming. If it makes faulty assumptions about the market, your portfolio may pay the price. Modern tech is amazingly advanced. Yet there's no substitute for human judgment.

Should I give robo-advising a chance?

This depends on a few variables. Are you a younger investor just starting out?  Do you have margin for error? An appetite for risk? The benefits may then outweigh the risk.

Are you uncomfortable with technology? Worried about information security? Or the owner of a series of complex investments? Then you might want to stick with a carbon-based advisor. For now, anyway.

There is a middle path. Some financial advisory firms offer a blend of automated and human services. Everything the computer does is reviewed by a human hand.

That might add some peace of mind. Yet it also makes the whole process less efficient. As automated investment technology matures, however, it's likely to put much of the current skepticism to rest.

That's bad news for financial advisors. Yet it could be excellent news for investors looking to cut costs.

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