Domo Arigato, Mr. Roboto


By Jeremy Office Special to The Pineapple In our May 2013 Maclendon Monthly, we discussed the effect of technological innovation in the labor market and how it has revolutionized industries. Technology, in particular robots, is a heavily debated topic. Technology can advance us in so many ways – but can there be too much of a good thing? For years people feared robots replacing jobs of workers. It was just a matter of time before technology infiltrated the financial services industry. The latest technological craze is the “robo-advisor.” This is a class of advisory service that provides online portfolio management with minimal human intervention. Collectively, robo-advisors managed an estimated $19 billion at year-end 2014. Robo-advisors appeal to some, but others may continue to find value in working with an actual human being. To clarify what a robo-advisor is and is not, we thought it would be helpful to explain the differences of working with a robo-advisor and a human advisor. Robo-advisors make various investment management decisions based on information provided by the investor. They implement algorithms such as the Modern Portfolio Theory, which attempts to maximize portfolio expected return for a given amount of portfolio risk. The minimum investment for some of these online platforms can be as low as $5,000 and they typically invest in passive strategies such as index funds or ETFs. Robo-advisors can also be a cheaper alternative to human advisors with average advisory fees around 0.20% of assets under management plus the fees of the underlying investments. In a fast moving world, where people’s days are more fragmented than ever; the convenience of robo-advisors has also supported their appeal to many investors. Investors no longer have to schedule a formal meeting to sit down with their advisor to discuss their goals and determine if they are on track to retire or send their kids to college. Millennials represent the largest demographic of robo-advisor users. Millennials are the most connected generation of our time and use their smartphones for many day-to-day activities. Growing up online, it is obviously a natural progression for millennials to start investing through their smartphones. Apps and other web based software have also made it easier for tech savvy millennials to understand and be comfortable with robo-advisors. All of this sounds like a no brainer right? No more meetings, cheaper fees, set it and forget it automatic investing; why would you go anywhere else? Although robo-advisors look like a great alternative to human advisors, there are aspects of a human advisor the robo-advisor are not able to achieve. To start, robo-advisors are not able to provide advice or guidance on complex financial matters outside of your portfolio. Everything from debt management, insurance needs, estate planning, etc., the robo-advisor will not be able to add the value of a human advisor. This is where a human advisor truly shines by bringing all of these aspects to work together. Although we may sometimes feel like a robot in our actions: wake up, eat breakfast, work a full day, hit the gym, eat dinner, and go to bed, repeat we are far more complex and superior than robots. We are generally considered highly social beings – we love relationships. When you hire a human advisor you receive more than just a portfolio allocation with automatic investing. You create a relationship with someone who knows everything about your financial picture; a financial “pilot” that can tell you to fasten your seatbelt during turbulence and help you achieve your goals and a safe landing. A human advisor knows what you might have on the horizon and how to adequately plan for the future. They understand the complexities of your business and family. Aside from the above mentioned attributes of a human advisor that a robo-advisor cannot compete with, the one attribute that sticks out the most to us is investments. Why would you go with a platform that offers limited investment options? As an investor you want to have access to the most robust investment universe available. You want availability to individual stocks, bonds, alternatives etc. At the end of the day we are here to generate positive returns in the most risk adjusted manner. The flexibility of investment options through a human advisor can be the difference between achieving the retirement you had envisioned or not. In our view, robo-advisors are best suited for those with fairly simple financial situations. If you need a platform that is automatic, you are fee conscious, and want a passive strategy, then a robo-advisor may be for you. But remember, you get what you pay for. At Maclendon we say that fees only matter in the absence of perceived value. Jeremy Office, PhD, CFP, CIMA, MBA is founder and Principal of Maclendon Wealth Management in Delray Beach. Maclendon provides comprehensive financial advice to successful, affluent individuals that have an entrepreneurial mindset and are looking for a dedicated team and exceptional wealth management services. He is also co-founder and Managing Partner of SJO Worldwide a venture capital company. 855.MAC.WEALTH