Maybe you have heard about Robo advisors and maybe you haven’t. If you haven’t, you will. They have raised $1 billion from venture capitalists to change the way you buy financial advice and services.
More than 100 million Americans use the services of advisors to help them plan their financial futures and invest their assets in the securities markets. Since time began, they have relied on professionals they could meet with face-to-face. After all, planning and investing are very personalized services.
Just like the Internet changed the way you plan vacations, it also has the power to change the way you invest your assets. The question is: will you be better off?
Two Types of Robos
The proto-typical Robo is an online service that has three key characteristics:
- It has automated the investment process
- It eliminates or minimizes human contact
- It charges low service fees
The second type of Robo has very different characteristics:
- It uses traditional investment strategies and processes
- It restricts human contact to telephone and email
- It charges typical service fees
Paladin refers to the second type of advisor as an OFA (Online Financial Advisor). They are traditional advisors who limit your methods of communication to telephone, email, and video – no face-to-face meetings.
The Robos would like you to believe algorithms, passive investment principles, and ETFs (Exchange Traded Funds) are the right way to invest your assets in the securities markets. They believe dedicated computer programs will produce better results than humans that are distracted by their other responsibilities. It will be years before this belief is validated.
Traditional advisors have provided very similar services for decades: Model portfolios, passive investment principles, and ETFs. What the Robos changed was making services available over the Internet for relatively low cost and automating several investment functions.
You may have already picked up on the single biggest difference – how you communicate with your advisor. True Robos provide advisory services, but they do not provide advisors (humans who will meet with you). This enables them to provide scalable online services for relatively low cost.
Robos evolved during one of the longest Bull Markets in history. Investment returns have been positive since 2009. Consequently, there is a lot of debate about how their users will react during the next substantial, prolonged stock market decline. Will they regret using a service that limits human contact? We will not know until there is decline that is steep and long enough to scare people.
Some Robos target millennial investors who were born between 1977 and 1994 for two reasons. They are more comfortable using digital services with limited human contact and they have smaller available asset amounts. Many of the best traditional advisors have minimum asset requirements that exceed the millennial amounts.
The parents and grandparents of the millennial investors have used the services of traditional advisors for decades. They expect to be able to meet with their advisors face-to-face. They want integrated solutions that combine planning, investment, and risk management solutions.
A revolution is coming that will provide new ways to invest your assets. You will have choices that impact services, expenses, and methods of communication. Do your homework so you make the right choice.
Jack Waymire is a member of the DailyWorth Connect program. Read more about the program here.