Tadas Viskanta has put together a nice collection of opinions regarding the new “Robo Advisor” trend. Here’s my general view:
“Robo “advisors” aren’t really advisors. They’re robo asset allocators. The robotic allocations are susceptible to flawed risk profiling and inefficient portfolio management for most people with a sophisticated financial plan. The business of asset allocation is too personal and customized to ever become fully automated so the best solution is some integration between the human and robot sides.”
Some of these are useful new services, but you have to be careful with them. When there’s no advisor involved you’re highly susceptible to poor risk profiling and behavioral problems along the way. After all, a robo advisor doesn’t help you stick to an asset allocation or help you manage it along the way. And I’ll be blunt about the risk profiling process for many of these services – it’s dangerously insufficient. While these are fantastic low cost options for many investors I do think they carry their own unique risks if they’re not utilized appropriately.
In summary, I’d argue:
- If you have trouble with your own behavioral biases and maintaining an appropriate asset allocation then you might consider a low cost advisor to help you implement the appropriate plan and maintain it. Additionally, if you’re in need of more planning services then it’s worth bundling a low cost advisor with your portfolio management services. What’s “low cost” in today’s world – I’d argue it’s anything less than 0.5% per year.
- If you don’t have trouble with your own behavioral biases and maintaining an appropriate asset allocation through market gyrations then you should just buy a simple Vanguard or Schwab ETF allocation and perform annual maintenance thereby cutting out the extra fees the robos or advisors charge for rebalancing and harvesting tax losses.
- If you don’t have trouble with your own behavioral biases and maintaining an appropriate asset allocation through market gyrations, but you’re too disorganized or busy to rebalance & harvest losses then you should consider one of the human PLUS robo options such as the Vanguard or Schwab offering.
I wrote much more about this topic a few years back.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.