Over the past twelve to eighteen months, easily one of the most featured story lines in the financial services business is the proliferation of 'robo-advisor' as a lower cost better way to have your money managed. Leaders in the industry such as Wealthfront, Betterment, and Personal Capital have been the frontrunners with a slew of new robo advisors literally popping up by the month.
Many investors have started to compare the 'robo-advisor' to their current financial advisor, but is it a huge misconception that you are really comparing apples to apples? Here are four important considerations you should have when deciding to go one route or another.
- Do you want money management and advice- Being an advisor for almost 25 years, clients often blur the line between paying for money management and paying for advice and planning. Admittedly, it is a very confusing line. If your current financial advisor is charging you a fee for 1%, it is possible that they are answering questions via e-mail, doing complex retirement calculations, or even analyzing when to take social security for FREE and not charging you for that currently. It can be somewhat of a quid pro quo because they do this because you have assets that they manage for you. Robo advisors will not be giving you day to day financial advice, so just be clear about all of the services you are getting because it can be confusing.
- Regular Money Managers Can't Offer FREE Money Management- You would think we all have the same rules in the money management business. However, if your wealth management is with a broker dealer, they won't be able to say, "I'll manage your first $10,000 for FREE." This is a marketing gimmick that 'robo-advisors' use, but it cannot be done by regular financial advisors. This can be another blurred area when a consumer invests their money.
- They Can Make Claims Your Broker Cannot Make- On one page of Wealthfront's website, it says "Incorporating Tax-Optimized Direct Indexing into your Wealthfront portfolio could potentially add an average of 2.03% to your annual after-tax returns." However, your broker that works at the bank, the wirehouse, or even an independent advisor cannot make these claims. Are they tax savings that add to returns? Is it real return? Just another point of differentiation that can make it hard for a consumer to compare apples to apples.
- They Will Pull Your Money Out During A Down Market- We don't really know what will happen with robo advisors at all when there is a down market. Studies have shown over time that the worst thing that happens to an investor during a down market is the investor themselves. It's important for a consumer to understand what a 'robo advisor' would do during a market crash versus a regular money manager. Only time will tell because it hasn't happened as of yet. Everybody looks good when the tides are rising.
Written by: Ted Jenkin
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