In a previous post, we explored how artificial intelligence is transforming the financial industry, making investing accessible to anyone, no matter their financial literacy or expertise. One such breakthrough is the use of robo-advisors in the management of investment assets. Despite their name, robo-advisors do not provide in-depth financial advice tailored to your specific needs or life stages. Instead, they are online financial service providers that utilize specialized software and proprietary algorithms to make investment decisions on your behalf. By 2025, it is predicted that robo-advisors will have over $16 trillion worth of assets under their management. A staggering sum when you consider that the first robo-advisor was launched just over 10 years ago in 2008. Well known robo-advisor platforms include Betterment, Wealthfront and Wealthsimple.
Last week, we outlined 5 reasons why a robo-advisor might be the ideal tool to help you achieve your long-term financial goals. We are now going to explore the shortcomings of using a robo-advisor and offer insight into whether you should consider signing up with one. Robo-advisors are not the ideal financial tool for all investors, and depending on your goals, unique situation and level of financial expertise, a traditional wealth manager may be exactly what you need.
4 Disadvantages of Using a Robo-Advisor
1) Lack of Financial Personalization and Guidance
Robo-advisors are often marketed as being able to fulfill all the duties of a traditional financial planner. This is simply not true. Like a financial planner, robo-advisors can effectively create and manage your investment portfolio, but unlike a good planner, they cannot get to know you on a personal level and help you implement an investment strategy that makes use of all the financial tools and opportunities available to you to reach your specific long-term goals. Investment managers exist to educate and guide you to where you want to be with your money. It’s an ongoing process and having someone guide you and help keep you on track can make all the difference. Unlike their human counterparts, robo-advisors simply cannot do this.
2) Inability to Help You Meet Short Term Financial Obligations
Robo-advisors primarily focus on long-term investments and growing retirement nest eggs. If your financial goals include getting out of debt and building an emergency fund, their services often fall short. For this reason, robo-advisors are not a one-size fits all financial tool, and getting a handle on your overall financial situation is something robo-advisors cannot help you do. We all know that long-term financial planning is important, but if you’re not in a stable financial position today, your chances of sticking to your long-term goals dramatically decline. In these situations, a traditional wealth manager can offer you helpful advice for meeting your short-term needs.
3) They Falsely Claim that They’re the Least Expensive Investment Option
Compared to the financial services industry as a whole, robo-advisors do possess lower fee schedules and lower minimum investment balance requirements. Yet, there are financial advisors who charge approximately 1% of assets under management for their services. This fee is comparable to many robo-advisors. Similarly, if you lack a healthy sum of money to invest, there are wealth management alternatives for those just starting out. The XY Planning Network is a fee-only financial planning community of advisors with an affordable monthly fee structure. They cater to young and new investors who are just starting out and charge a flat fee which puts a cap on their charges.
4) Your Choices Are Limited
There exists a plethora of asset classes to invest in. If you’re seeking to create a diversified portfolio that includes investment choices outside exchange-traded funds and stocks, you will likely not be satisfied with the limited options provided by most robo-advisors. If you want to play an active role in selecting the type of assets you invest in, a traditional investment manager will work with you to create a diversified portfolio that reflects your choices.
Should You Choose to Invest With a Robo-Advisor?
Like any investment tool, robo-advisors provide benefits to investors with specific needs. If you’re young, have more than 20 years until retirement, wish to build a simple portfolio and lack investment experience or are simply unsure where to begin, a robo-advisor is an excellent option for you. On the other hand, if you have short term financial obligations to meet, you’re closer to retirement and fear that your investment strategy is falling short, you want a face-to-face relationship with your financial advisor and you enjoy having a say about the assets in your investment portfolio, a traditional financial planner or investment manager will better serve your needs.
If you’re still unsure whether you should use a robo-advisor, financial experts advise to err on the side of caution and opt for a human advisor. In times of economic uncertainly robo-advisors will do little to soothe your nerves and talk you out of making rash decisions. Robo-advisors also do not know about your particular needs. If you have a special needs family member that requires long term care or are one mistake away from losing your job, a human advisor can better adjust your financial plan around these circumstances. Of course, there is nothing wrong with using a robo-advisor to manage your money until you find the right financial advisor for your unique needs.
Would you use a robo-advisor to manage your investment portfolio? Let us know in the comments section below. If you enjoyed this post, please subscribe to our Blog and follow us on Facebook and Twitter for news, updates and more helpful content!