The Pros & Cons of Using a Robot Financial Advisor

By Doug Matus

Robo-advisors have arrived as a much-hyped alternative to traditional investment advisors. As with any financial product or service, these digital assistants come with a full slate of relative drawbacks and benefits.

As a catch-all term, “robo-advisor” covers a broad range of available digital products. Before you choose which digital advisor is best for you, expect to perform at least as much research as you would for a human advisor.

Regardless of which you’re interested in, all robo-advisors claim impartiality as a primary benefit. Design companies make claims that this impartiality — along with the strength of their algorithms — leads to better returns at a lower overall cost.

Of course, these automated services have not completely outclassed the human competition, and a potential investor should carefully weigh the pros and cons of robo-advisors.

Benefits of Robo-Advisors

If cost is a primary factor in your choice of investment advisors, then robo-advisors have a clear advantage. Before the arrival of digital alternatives, investors would struggle to find assistance for their money at a cost below one percent of managed assets. Robo-advisors have made rates of 0.25 percent or less much more common, a clear boon to cost-conscious investors.

On the topic of budget-conscious investing, many robo-advisors specifically cater to customers with few assets. Whether you’re new to investing or simply don’t have a lot of capital, a robo-advisor can serve as an excellent introduction to the world of financial planning. For example, industry-leader Betterment allows investors to start with as little as $100. Other robo-advisors, such as WiseBanyan, have no minimum balance requirement.

Meeting with a financial advisor can feel intimidating, especially for someone who knows next to nothing about investing. The impartiality and automation of a robo-advisor, combined with the lower fee model, can make them more appealing to first-time investors. Also, many investors can find it beneficial to begin financial services with a robo-advisor, then transition to a human advisor at a later date.

Not Quite a Slam Dunk

All the drawbacks associated with robo-advisors arise from an obvious point: lack of a personal touch. There’s nothing that a robo-advisor can do to reassure a nervous investor, nor can a digital product fully grasp the individual circumstances of every consumer.

“The main drawback to robo advising is the lack of a human element,” says Mel O, a certified financial planner. “In 2008, many people were terrified about the market never returning. Because I knew my clients, it was easier for me to speak in terms that would resonate with them, and keep them invested for when the S&P came back with a vengeance.”

An investor is more than just a portfolio. As Mel O illustrates, only a human advisor can assuage fears and explain the mechanisms of the marketplace. Robo-advisors can also struggle to cater to investors with non-traditional financial situations. For truly personalized service, human advisors have little competition from their digital peers.

The personal touch of a human advisor gets exemplified in one service that no robo-advisor can provide: a face-to-face meeting. If you feel the need for a personal connection, and want investment questions answered from across a desk, then a robo-advisor is probably not the best choice.

The Bottom-Line

Despite these drawbacks, robo-advising has led to some overall benefits in the field of professional asset management — such as lower fees — and remains in its infancy. In years to come, who knows: robo-advisors coupled with A.I. may fully supplant traditional human advisors. For the investor of today, however, the pros and cons of robo-advisors hardly make for an obvious choice.

“Generally, robo-advisors can be useful, especially for new investors,” says Jeff Kelley of Equity Institutional. “But they have not reached the level of sophistication needed to address the investment and retirement needs of most investors.”

As with any financial decision, you’ll want to weigh your options and consider your situation carefully before you make a choice. At the very least, a robo-advisor provides an additional tool to craft the investment support you need.

About the Author

Doug Matus is a freelance writer who regularly contributes to Self.

Written on August 18, 2016

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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