Planning for a comfortable financial future can be hard work. With so many different investment options available and so many strategies to consider, it can be tricky to figure out the best path forward—particularly when you personally manage your finances and investments.
To supplement and enhance their own efforts, individuals who are looking to develop a financial plan and invest their assets may opt to partner with knowledgeable advisors. Historically, this meant partnering with a person you could talk to and sit down with to discuss strategies and plans. In the age of technology, however, it can also mean using a “robo-advisor”–an automated financial advisory service.
Robo-advisors rely on automation to ease the burden on human financial planners and lower administrative and operational costs by removing or minimizing human interaction with a client and a client’s portfolio. Automation can be an efficient means to accomplish certain tasks, but computer algorithms naturally lack a human touch. Automated processes alone may be unable to understand sociological or psychological concerns of a client, and may lack the ability to offer “behavioral coaching” which Vanguard’s Advisor Alpha suggests as one of the primary benefits of working with a financial advisor. For this reason, new robo-advisor offerings have evolved to also offer 1 on 1 human professional guidance, in addition to the financial plan created by a robo-advisor.
Which is the best option for you? Let’s take a look at the specifics to help you figure that out.
First things first, some definitions:
Robo-advisors are online financial advisory services that can help manage your portfolio by using algorithms to make recommendations programmatically. Instead of discussing your needs and options with a person, you let the financial advisor tool know what your goals and needs are. Based on your answers to questions such as your risk tolerance, investing timeline, goals, and other preferences, the robo-advisor will create in asset allocation which aligns with your answers. Most robo-advisors, though not all, rely on Modern Portfolio Theory to create the investment portfolio, a theory developed by Harry Markowitz on how to maximize returns based on a given risk level.
Rebalancing, or the buying and selling of securities to return to the preferred asset allocation, is another common feature among robo-advisors. A deviation from a desired asset allocation can occur when, for example, shares of a stock appreciate in price so that there becomes a greater percentage of your total portfolio now made up of stocks.
As mentioned before, robo-advisor services are offered as either stand-alone services, or in conjunction with some human advisory services.
A personal financial advisor is a human advisor that offers financial and investment advice. As opposed to robo-advisors, human financial advisors are not automated services, but rather a person who is trained to offer financial advice to clients, although the knowledge, accreditation, and experience of a financial advisor can vary greatly.
The benefits a human advisor offers are the qualities that cannot be replaced by a computer program. A human financial advisor may be someone admired by their local community, someone to celebrate you entering retirement, or someone who offers comfort during troubling seasons. While robo-advisors are becoming increasingly “higher-touch” through emails, webinars, and other mediums, you may prefer the relationship that comes from working with a human advisor.
Different people have different preferences.
Some people might want a more personalized financial plan and investment strategy as well as a personal advisor who knows their specific situation, others might be more comfortable minimizing costs and investing with the guidance of an automated computer program; some may even want some combination of the two. According to a recent study, 88 percent of Americans believe that technology should complement the services of a personal financial advisor—not replace financial advisors altogether.
Which option might be best for you?
Ask yourself these three questions to help determine the best fit for your unique situation.
While it may be difficult to quantify, working with a human advisor may provide intangible benefits beyond the benefits offered by a robo-advisor alone.
You may be a small business owner looking to work with an advisor who has experience as a business owner. You may be in a sensitive place after exiting a difficult marriage or becoming a recent widow. You may simply like working with a certain individual due to shared hobbies or the same alma mater.
Your current situation’s needs and preferences will be a primary determining factor of whether a human or robo-advisor is right for you.
Some people are less interested in a set it and forget it financial plan and want more comprehensive, qualitative coverage. Things change. Life happens. Maybe one of your kids get married—or maybe you do. Maybe there is a death in the family. Maybe an unforeseen medical issue pops up when you least expect. A robo-advisor that is not accompanied by a human financial planner may not offer the level of comfort or qualitative expertise needed to navigate these life events.
However, your plan will only as good as your willingness to communicate changes in your life. While working with a human financial advisor can open the dialogue, working with a human advisor won’t allow for updates to a financial plan unless the changes in your life are relayed. Both human advisors and robo-advisors will be limited by the information you provide them; a human advisor might be better-suited to process those changes with you.
What did you do in 2008? What about during the dotcom bubble? Do you pull your money out at the bottom and buy at the top? Are you consistent with your contributions to your investment accounts? In times of stress, panic and uncertainty, a human advisor can do wonders to help one steer their financial ship through the storm.
For example, DALBAR, an independent research company in the financial industry, has been conducting a Quantitative Analysis of Investor Behavior each year since 1994 and measuring the portfolio performance of individual investors compared to those who have financial advisors. In the 2018 survey, “the average investor was a net withdrawer of funds in 2018 but poor timing caused a loss of 9.42% on the year compared to an S&P 500 index that retreated only 4.38%.”
There’s also the Vanguard Advisor’s Alpha study mentioned earlier that provides insight into how personal financial advisors can add more value to clients, beyond just portfolio management. It is a comprehensive approach for investors to “provide relationship-oriented services—such as cogent wealth management via financial planning, behavioral coaching, and guidance—as a primary objective of the value proposition study of investor behavior and investor returns.” Some robo-advisors may fall short as your financial coach during market downturns and other life events that may cause irrational behavior.
There’s no absolute right or wrong answer when it comes to choosing between a robo-advisor and human advisor. Human advisors will always be able to provide a greater degree personal touch, relationship, shared experiences, and intuition. However, robo-advisors are becoming increasingly sophisticated and higher-touch, particularly as more and more robo-advisor services provide a combination of the two offerings. You’ll need to spend some time thinking about your needs as a client to know which option is right for you.
To learn more about how EP Wealth Advisors can help you plan for your future, check out our Why EP page.
The EP Wealth Advisors financial planning process starts with the relationship between you and your financial advisor. How do you value a financial coach? Developing a partnership that ensures we understand your goals lets us help you prioritize and organize your financial decisions—so you can achieve peace of mind and live your life.
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