In today’s age of texting and tweeting, the human element often is removed from daily interaction. Many people prefer the ease of use provided by online tools and mobile apps for everything from shoe shopping to scheduling a doctor’s appointment to booking a table at their favorite restaurant.
For virtually any consumer product or service, there’s technology available to support it. Investing is no different, thanks to the emergence of robo-advising.
Robo-advisors are fully automated online investment platforms. Unlike online trading forums such as Scottrade and OptionHouse that simply provide a tool to buy and sell stocks and other investment products, robo-advisors allocate assets to meet their clients’ individual goals, continually rebalancing their portfolios for diversification.
“Online trading is for people who liked to chose investments themselves and have control,” said Chris Russell, senior vice president and director of business development, J.J.B. Hilliard, W.L. Lyons LLC. “Robo-advisors are for people who do want some advice and don’t want to make investment decisions on their own, but they want to leverage technology and invest at their own pace.”
Fees for robo-advisors are often lower than for traditional financial consulting services. As a result, they have become attractive to younger, less experienced investors still in their wealth accumulation phase, typically with $50,000 to $100,000 invest.
“If you don’t have a lot of investable assets, and you don’t have many complexities or needs outside of simple investment management for a single goal – whether that be retirement or education – that’s when robo-advisors may be a good fit,” said Russell.
But it’s not necessarily a certain asset level that makes robo-advisors a good or bad choice, he added.
“If you have $10,000, $100,000 or even $1 million, and you aren’t investing today and need a place to start, robo-advising might be a good option. But the benefits of working with a financial advisor will be realized sooner rather than later because they can understand the whole picture and your long-term goals.”
The big picture includes financial and investment needs that can’t be met by robo-advising, he added. “The obvious difference between robo-advising and traditional investing with an experienced financial planner is that you don’t get comprehensive advice – estate planning, insurance needs, income planning for retirement, or tax advice,” said Russell.
In times of volatility, financial advisors also put economic conditions in perspective for their clients.
“While robo-advice provides you with asset allocation and diversification, oftentimes investors make the biggest mistakes when they respond emotionally to fluctuations in the market,” Russell said. “A financial advisor’s main job is to keep a client invested and avoid making rash decisions. Robo-advisors don’t give that kind of advice to their clients. At the bottom of a market, when emotions are running high, there is no one hand-holding them through that process, so they may sell at the absolute worst time.”
Another limitation with robo-advisors is their investing scope. Most typically leverage only mutual funds or exchange-traded funds (ETFs), and they don’t allow investors to pick individual stocks.
“When you have an individual stock portfolio, you can manage your tax consequences a lot better as you buy and sell different positions,” Russell said. “You can’t do that with mutual funds and ETFs as efficiently and effectively.”
Despite their limitations, robo-advisors won’t be fading into the background any time soon. According to an April 24 Wall Street Journal article
, more than 200 companies have jumped into the online advising business since 2009, from startups like Betterment to big-name firms like Charles Schwab. At present, they are only a small piece of the wealth management pie, which is an $18 trillion market. At the end of 2014, robo-advisors represented only $16 billion in total assets under management. That number is projected to increase to $60 billion by the end of this year, but that is still only 0.3% of the market.
The bottom line is that robo-advisors are simply using technology to target clients with smaller investing needs. “Will they ever replace financial advisors? I don’t think so,” said Russell. “The hands-on client guidance needed for complex investing decisions is never going to go away. Robo-advisors simply can’t provide that.”
Since 1854, Hilliard Lyons has helped thousands of individuals create, preserve, and pass along their wealth to the next generation. Contact a Hilliard Lyons financial consultant today for a customized wealth management plan delivered with personalized service.