ROBO advisors seem to be everywhere today. They’ve really gained attention in the past few years, so many of our clients have been asking questions about them. We’re here to talk about ROBO advisors in a nonbiased manner so that you can decide what the best option for you is when trying to secure your retirement.
What is a ROBO Advisor?
The term “ROBO” should give you a clue that a ROBO advisor is a computer that helps manage your investments for you. When you work with one of these advisors, you’ll add in your own instructions, and then let the advisor do all of the work for you.
You don’t have to think about your investments, but the advisor is also somewhat limited because it’s listening to your instructions and not going outside of those parameters.
ROBO advisors won’t go out and recommend that you drop Apple and invest in Amazon, for example, because it’s not an active advisor. The main way that these platforms work is through what is called allocation.
What is Allocation?
ROBO advisors work on the computer. You’ll open an account, go through a risk assessment, and then the advisor will use this information to create an asset allocation ruling. You may be put into a moderate portfolio, based on the assessment, which may mean an allocation of 60%/40%.
What does this mean?
Your portfolio may be broken down into:
- 60% equities
- 40% fixed income / bonds
And then within this allocation, the platform may decide that you have 60% in equities allocation, which may include:
- 10% small cap
- 10% mid cap
- 10% large cap
You may have committees, international stocks and so on. ROBO advisors will select all of these investments for you. Over time, potentially every quarter, the program will look at your portfolio and readjust as necessary.
For example, let’s assume that stocks performed well and now your small cap is at 12% of your allocation. The platform will balance this out, based on the original allocation ruling, so that your portfolio is rebalanced.
ROBO advisors are algorithmic, and they will rebalance almost perfectly based on your input.
If you’re a person that is just starting their retirement planning or someone that doesn’t want to work with an advisor, the ROBO advisor may be a good option for you because it listens to your input from start to finish.
But these platforms are also limited.
What ROBO Advisors Can’t Do
ROBO advisors are advancing, but they’re still limited in what they can do. Let’s assume that the market is crashing, the platform will just keep rebalancing. The advisor doesn’t understand what is going on in the world.
Let’s assume that you have a large holding of oil stocks, the platform won’t know to adjust out of these holdings if a huge stockpile is entering the market and devaluing the price of oil.
Your advisor won’t consider:
- The financial goals you set
- You wanting to travel and needing income every month
- You wanting to leave money to your grandkids
ROBO advisors only work inside of the allocation ruling created, so if the market drops or another pandemic hits, you can lose a lot of money in the process.
Human advisors, on the other hand, will consider your goals and having to draw from multiple sources of retirement. A human advisor will look at the entire picture of your retirement to determine:
- What income is coming in
- How a pension can benefit your retirement
- If your current lifestyle may lead to not having enough assets for retirement
- Etc.
Retirement planning has a lot of moving parts. It’s difficult for a ROBO advisor to consider that you’ll need money for long-term care because the platform isn’t designed to provide this type of advice.
What if your expense plan needs adjustments? What can you afford? Do you need some form of insurance?
These “what if” scenarios can’t be answered with a computer. A person can provide this advice to you and think about your needs.
But that doesn’t mean that a ROBO advisor is bad either.
If you believe that a “buy and hold” strategy is the best option for you, a ROBO advisor is extremely cost effective. An advisor can then help you with other things, such as insurance or long-term care needs.
Both a ROBO advisor and a human have their advantages, and it’s important to consider all of these advantages and disadvantages to determine what type of advisor is best for you.
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