November 8, 2016. By Richard Greene:
Understanding the psyche of the American consumer can be one of the most challenging exercises marketers and service professionals can attempt. America has become very much a culture of “do it yourselfers” with an obsession with what media refers to as DIY. From home improvement, starting businesses, filing taxes, or selling homes, much of the population feels empowered to independently control more and more aspects of their lives. Empowerment is great, and technology is certainly a way to leverage time, however there are some tasks that are best completed without behavioral bias and with professional guidance.
Over the last decade the DIY phenomenon has infiltrated the investment industry as well. Between the plethora of financial information available in an instant and growing concerns about large banking institutions, many investors have taken investment management into their own hands. These DIY investors have strayed from traditional methods in an effort to minimize certain expenses, fees and conflicts of interest that are perceived to exist between them and their advisers. These are completely reasonable premises given the negative media attention cast upon the financial services industry of late, and fortunately the independent investor has many viable resources that can professionally accommodate many of their investment needs.
However, we at Centerpoint Advisors have some serious concerns with models that rely solely on a “Robo-Advisor”. Robo-Advisors are a growing component of the financial services industry where by virtue of a questionnaire and a set of algorithms, a seemingly “optimum” investment strategy can supposedly be created, many times at a very low cost. While this may be attractive, it is unlikely to prove to be a strategy that benefits investors over their lifetime given the many complexities individuals face and the economic cycles they will experience. Trying to have one’s money work toward holistic goals is more complex than proposed by the famous Rotisserie commercial…when it comes to investment management, you cannot simply “set it, and forget it”.
Assumptions are at core of a “Robo” strategy and are usually predicated on historical events; unfortunately, there is no way to predict the future. Despite our best efforts our lives are filled with uncertainties, as is the world in which we live. Do these algorithms adjust when someone is at risk of losing a job, when a parent needs financial assistance for medical needs, or when a Geo-political event like 9/11 shakes the world to its core? Algorithms, although helpful in determining efficient models, do not have the intuition to adjust based on your life events.
The ability to consider an investor’s entire financial picture should not be underestimated. Obtaining an understanding of this 360 view is what sets a human advisor apart from a robo-advisor. This is an integral component of being a fiduciary, and it is highly questionable whether a robo-advisor can truly fulfill that duty. Acting in a client’s best interest goes beyond simply avoiding conflicts of interest; a client’s needs are not static and being a fiduciary also entails responding to change which requires open and ongoing communication. If a human advisor neglected to return your phone calls, respond to your emails, or meet with you in person, you most likely would find another advisor, and yet this detached effort is essentially the service model of a robo-advisor.
Consider the case when Betterment, one of the largest of the robo-advisors, blocked account access and halted trading without notifying clients in the wake of the Brexit vote in June. While Betterment stated that it took such actions in order to protect investors from the ensuing market volatility, the lack of client communication is still troubling, as is the possibility that the lockdown may have prevented investors from buying into the market when prices had dropped and thus taking advantage of the selloff. The across-the-board trading halt was indicative of a one-size-fits-all approach and highlights the fact that clients of robo-advisors are more likely to be treated collectively rather than individually. Human advisors are not so inflexible and are in a better position to accommodate the needs of the individual investor.
Of note is that a meaningful percentage of “independent investors” who manage the bulk of their assets independently still maintain a relationship with a trusted advisor with some of their assets. We contend that when the going gets tough, having the input of an experienced professional is well worth the associated costs. Investing should be considered as part of complete wealth management, and although basic investing has become somewhat commoditized, relationships have not. You should be working with an advisor that is leveraging technology enhance your client experience but also has their finger on the pulse of your goals, personality, and risk tolerance.