What if humans could coexist with robots? Gasp! (the nerve)
Relax. I’m not talking about creating little half-human, half-robot babies here. I’m talking about not viewing robots as competition, but rather as a tool to use for enhanced service.
There have been countless articles pitting robo-advisors against human advisors. The robo world says they can do things better, faster, cheaper. The advisors say that the human element is the most important piece of a comprehensive plan. It’s like the old Miller Lite ad: “Tastes great! Less filling!” You both like the same beer! Stop fighting!
At the end of the day, robo-advisors and human advisors are both trying to do the same thing, help the individual better prepare financially. Imagine the possibilities if they created a Ro-mance, as Bender says. I know there are some firms that have adopted this idea but it is largely still a competition. The logic is that if the two team up and each focus on what they are good at, then everyone wins…especially the client.
What Is a Robo-Advisor?
A robo-advisor is an automated, algorithm-driven investment tool that focuses on asset allocation and rebalancing using low-cost index funds. It is largely based on modern portfolio theory and efficient market hypothesis (academic theories that have been around a long time; opponents say “But now is way different…” Check your Google machine for more info). (For related reading, see: What Robo-Advisors Can and Can't Do for Investors.)
Why Use a Robo-Advisor?
The goal of a robo-advisor is to minimize fees and remove emotion from investing. The whole world knows buy low and sell high. Emotion says buy when the market is going up and sell when you start to panic as it crashes. Emotion is usually not good when investing.
What Is a Financial Advisor?
That is a bit more difficult to define. In broad terms they could potentially advise on insurance, investments and/or taxes. For our purposes we will focus on investments. There are brokers, who earn commissions on products sold based on suitability of your needs. There are planners, who charge a fee for planning and advice (often times as a fiduciary, which means they have to act in your best interest). They are regulated and licensed by FINRA, the SEC, and/or states.
Why Use a Financial Advisor?
Financial advisors provide a human touch which can lead to a better understanding of your goals and guidance to help you achieve them. They can help you come up with a comprehensive plan which may help you prioritize multiple goals, address insurance needs, assist with estate planning, and deal with complex financial situations. (For related reading, see: 5 Reasons to Use a Financial Advisor.)
Oftentimes a financial advisor spends a significant amount of time creating and monitoring portfolios for clients. How much value are they really adding there? Their real value is in the relationship. After all, if he or she was the world’s greatest stock picker wouldn’t they be running a $10 billion hedge fund? Advisors should get out from behind the computers and in front of more clients building relationships.
How awesome would it be if you found an advisor who used a robo-advisor to complement their services? The human would look at where you are compared to where you want to be and help figure out how to make it happen. One small piece of that puzzle could be the robo-advisor for your investments. (For related reading, see: Growth of Hybrid Robo-Advisors to Outpace Pure Robos.)
What that would mean for you is an advisor who understands you and your goals and provides a comprehensive plan, all while minimizing fees on your investments.
Love is in the air. Robos and humans can complement each other. It could lead to a budding Ro-mance.
(For more from this author, see: Why Investing Doesn't Have to Be Confusing.)