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Why the “Robo-Advisor” Might not be the Best Investment Guide

March 27, 2017

Can a machine give good investment advice? Some investors think so—learn what is luring some investors to enlist the help of a robo-advisor—and why this may not be the best decision.

Robo-advisors...the future of investment advising? These autonomous investment advisors have become the latest trend in the financial services industry. While automating the investment portfolio process might seem like an efficient practice, it is crucial to remind yourself of one question, “Does a machine really know me and my specific needs?”

More about robo-advisors

The term “robo-advisor” encapsulates a number of different ideas. Basically, it is investment management software that automates the investment process. The software uses a short questionnaire to measure a potential investor’s risk tolerance. Within seconds, the robo-advisor generates an investment portfolio deemed appropriate for that individual’s profile, based on an expected risk and reward basis.

The lure of the robo-advisor

A lot of young investors, or those just starting out, want a good bargain, want to work online and expect a quick return-on-investment. The robo-advisor is attractive to them for these reasons. Others turn to the automated investor because robo-advisors require low minimum balances to invest. However, there are a few major drawbacks that many investors are overlooking.

Drawbacks

  1. Technological financial advice relies heavily on a very small amount of information provided by the investor when he/she signs up for the service. Because every person’s risk profile is different, due to different factors (income, career, marriage, children, retirement, major purchases etc.), this cannot be boiled down to a few multiple choice questions.
  2. Expanding your portfolio is ideal, yet what you do with it and how you protect your family are areas in which robo-advisors are rarely helpful.
  3. Robo-advisors often give you only exchange-traded funds that track well-known indexes.
  4. Robo-advisors lack the ability to directly communicate with their clients.
  5. Robo-advisors don’t have the ability to adapt to changing markets or circumstances.
  6. An investment portfolio drawn up by a robo-advisor is based on a single moment in time which may be heavily partial to short-term events or emotions.

What’s different about a traditional advisor?

A human investment advisor on the other hand....

  • Will adjust investment profiles and strategies periodically to match an investor’s changing profile
  • Will rely on personal situations and risk profiles, not static assumptions
  • Will meet face to face to help investors reach long-term financial goals by advising how much to invest and how much to save.

The price concern

If you have money related issues and concerns, consulting a human being might be better for your situation. Though the ease of the robo-advisor is attractive, your situation might not be well suited for the cookie cutter algorithm approach used by these automated investment guides.

Questions on robo-advisors? Wondering which route you should take? Contact us.

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