Can you explain why a live advisor is a better option for financial advice than a low-fee, low-minimum automated advisory service?
While researching different options for financial advisors, I came across automated "advisor-like services" with very low fees and a low minimum. Can you explain why a live advisor is better option for financial advice? Should virtual advisors systems be used for some funds and not for others?
For some people, the automated, low-cost option IS the best option, but many others want and need the advice and coaching of an advisor, because my job as an advisor was MUCH more than just managing your investment accounts. For example, all of my clients recieve financial planning services if we manage investment accounts for them (at no additional cost). We get to know you and stay alongside you throughout the years as your life circumstances (death, job change, new additions to the family, divorce, marriage, aging parents, inheritance, etc.) change. It's more of a coaching or shepherding experience for our clients, and it's a relationship that deepends over time. Many of my clients are now very good friends.
One good example of why you might want an adivsor is - how are you feeling watching the markets bounce around right now? Does it worry you? Make you nervous? Make you want to get out of the markets?
Helping to manage your emotions and stay on track is one of the most important jobs a human advisor will do for you. A Robo will only follow orders, and you can steer yourself off a cliff letting emotions make those money decisions.
All my best!
As "live" advisors, we are always trying to explain to consumers how the value we bring to the engagement is worthwhile. One of the first things I tell a prospect is that you cannot compare my fees with "advisor-like service" fees. They are not comparable. I also ask them whether they will determine value based upon some market return comparison. I explain that with the advent of cheap and free investment vehicles there is no reason to hire an advisor of ANY kind of you are only after some market comparison return---just buy the index and be happy.
So why hire a "live" advisor? Here are some of the things they bring that an "advisor-like services" cannot:
The question is, do you need professional help in order to design and stick to an effective financial plan? To some degree, this depends on your unique situation, but most will find that they are better off seeking the information, expertise, experience, and discipline provided by a financial advisor.
Making quality financial decisions requires an ample commitment to learn and research. While the Internet's easy access to information has helped to make it feasible for individuals to independently manage their finances, the magnitude of investment skills and information that you need can be overwhelming. The financial world is filled with foreign concepts, esoteric language, legal rules, and difficult methodologies. Whether you want to develop a portfolio, plan for retirement, pay for college, or reach any other major lifetime goal, there are professionals who have spent their careers serving people with the same concern, and it is a good idea to take advantage of their experience.
For the purpose of analogy, consider the manufacturing of televisions. Since they make so many televisions, Samsung has grown to be good at it. They can make a high-quality television for a just a few hundred dollars. Consider how much it would cost you to make your own television; you might be able to do it, but it would take a huge commitment of time and money to learn the science, purchase the materials, and execute the necessary procedures. And the finished product would likely be questionable in comparison. Financial decision-making is the same. You can make financial decisions by yourself or get advice from an experienced professional. The financial decisions of individuals are commonly costly. The appropriate financial professional will make help you make good decisions at a comparatively low cost.
What will I get from a financial advisor?
Professional financial help goes far beyond picking stocks. Hiring an advisor arms you with expertise and resources with which to approach planning your financial future. This coaching and support can help you to smoothly endure and make the most of the circumstances in your life -- career, marriage, children, assets, liabilities, etc.
This is the position that I consider myself in: the "coach" to walk you through life experiences, making sure that your emotions (or in this case, some computer algorithm) don't get in the way of the plans that you have for "life"
Specifically, financial professionals can help to:
Avoid costly mistakes, manage risk, save time, and improve your overall investment results.
Guide you through the maze of retirement options -- 401(k), 403(b), 457,IRA, Roth IRA, pensions, annuities, Keoghs, etc -- and can put you on course to have the type of retirement you've always dreamed of.
Decrease your estate tax liability, thereby aiding the financial stability of your loved ones.
Reach your education savings goals through 529 Plans, Coverdell savings accounts, and other techniques.
Determine the type and amount of insurance you need to protect yourself, your family, and your assets.
Minimize your taxes, file your tax returns, and plan to reduce future tax impact.
If you own a business, develop a strategy to manage your business finances, including cash management, financing, employee benefits, and corporate taxes.
Furthermore, a financial professional provides the emotional discipline required to make sure plans are acted upon. The professional’s guidance, reassurance, support and stability to help you stay on course and reach your long-term goals.
So you can ask questions like you are now :) In all seriousness, because it is simply a "buy-and-hold" investment strategy that doesn't take evasive action or hedge during times of major market duress. Look at whatever static pie chart they recommend to you based upon your age and risk tolerance, and then go and see how that same allocation did during 2000 or 2008. The robos will tell you they weren't around then but you can easily find multiple surrogates/indices for each piece of pie. Even the most conservative robo models lost 30%+. The most conservative one today can only hold 7% cash/money market at any given time if memory serves. It is not all about absolute returns or especially lowest costs, but risk-adjusted returns and are you getting value for your money. Is it a smoother ride and easier to handle. I can get 60 miles to the gallon if I want to drive a very small tin box, but one guy running a red light and my whole family is toast. Now I am not going to drive a Rolls Royce either. I prefer a nice, mid-sized SUV which is a good value, decent gas mileage, plenty of room for my kids, and safe for my family with safety being the main factor. It is a good value proposition.
You see, those robo models have you fill out a questionnaire to determine your "risk tolerance." Guess what, your risk tolerance is completely irrelevant to the markets and the markets don't care about you at all. It is much more about the risks in the markets or sectors than your risk tolerance. Case in point, you've heard that if you're older then you have a low risk tolerance due to limited time horizon, and therefore should have more bonds - so older equals more bonds. Never mind the fact that we are at the end stages of the dropping interest rate supercycle and rates are now rising from artificially and historic lows. This makes longer maturity bonds unusually risky and dangerous. Did you know that Treasury bonds lost -32% from 1977-1979? Did you also know they lost -22% between 1984-1985? But I thought Treasuries were safe?! They are normally, but inflation is kryptonite to bonds worse than rising rates. Now I understand that a retired person may need "income" so a combination of other types of cash flow producing assets in conjunction with some midterm investment grade bonds may be better. And no, not annuities!
What I am saying is the risk profile of asset classes changes over time, they are not static. And they can change quickly not based upon your age. Remember, the markets don't care about you. But most important, people's risk tolerance changes with the markets. This is called Behavioral Finance. When the markets are rallying everyone wants in, but when the markets are crashing everyone is a wimp and wants out. Investors will hit their different pain thresholds as more & more stop loss layers are triggered. Many of these investors will sell very near the bottom even though they said they are a long term investor and have the questionnaire to prove it.
You've been told "the markets always come back" and that is fine if your lifespan is a tree. But will the money be there when you need it and can you withstand a bear market emotionally are the big questions. Every 8 years or so, the markets experience a major selloff. This is well documented going back over a century. After that the data gets a little sketchy. So in my humble opinion, timing does matter! So does managing drawdown risks. In fact, I would rather give up a little on the upside to reduce the downside.
But if you are willing to go through a bear market without defense, and do plan to buy-and-hold, then an automated or Roboadvisor is fine. However, with a little research you could do this on your own using Vanguard or State Street ETFs and avoid the Robos altogether. And if you get an advisor who simply tells you to buy-and-hold and is going to put you in a pie chart of mutual funds, then you don't need them either unless they are advising on other matters. In fact, be wary of the funds they are putting you in and be sure they are the "institutional" or "investor" class shares and not more expensive class shares the advisor benefits more from.
At our shop, we are a fee based only, active advisor who has well defined selling rules to limit drawdown risks. In fact, currently on 3/2/2018 we have only 65% exposure and have been taken money off the table in layers over the past 6 days and have one hedge. This is to reduce volatility and we will unwind quickly & get fully invested when the fear has subsided. This could be as early as Monday but we'll see. This is active management versus passive. Additionally, I help clients with their tax - both corporate & individual - and estate planning, not just retirement or education. So we are a full service advisory and are not low low cost, but are competitive for the services. It is a smoother ride and a value proposition.
Hope this helps and best of luck, Dan Stewart CFA®
Some advisors, including us, use automated advisor-like services to leverage leading technology. However, having a licensed, human advisor can add great additional value such as overseeing your portfolio and understanding your story. A robot cannot answer specific answers unique to your situation.
Dan Stewart makes a good point. A human can better answer some questions.
First, let's consider what an automated "advisor" really is. It is a way to automate investing. It is a digital platform for investing. It is NOT a platform for advice. I use a digital platform to help me manage smaller accounts in an efficient manner (for clients just starting out or the smaller accounts of clients with larger holdings) these platforms are only vehicles for investing. They may be well suited for some people, but not for everyone. I use financial planning software, but the software only shows the results of computations, it does not provide advice.
While investing is a very visible function of any advisory firm, it is not always the most important. No matter how good an investment portfolio is, if there isn't adequate protection (e.g. insurance) one catastrophe can wipe it all out. While 529 plans are a great tool for saving for education, they may be better used in conjunction with other vehicles. Contributing to your employer's retirement plan is good, but could there be better ways to save that would provide for more flexibility in retirement? Finally, I haven't seen to many low fee, low minimum, automated advisory services meet with a client while they are in hospital to make sure their affairs are in order because an unexpected malady cut their life short.
Personal finances are just that, personal. The server sees an account as a bunch of numbers and holdings. What we see behind each account is a person, or a couple, or a family. We never lose sight that it is about people.