Making Cents: To Robo or not to Robo
By: John P. Napolitano, CFP®, CPA, PFS, MST
The financial world has been introduced to a new term over the past few years. That term is Robo Advisor. It sounds simple enough, but when you look at the long list of confusing jargon that already exists in the financial world, this is no different than many. It sounds like one thing but may really be something completely different than what you need.
The service offered by so called robo advisors is investment advice. In effect, a computer program is building and managing your portfolio with little input from a human being. That means if you freak out during market downturns, and tell your computer guided manager that you are freaked out, it may easily accommodate your fears by getting you out of all risk assets. This may feel good when you have the power to change on a dime without any push back – but that may also be the worst thing that you can do. Surveys by Dalbar, Inc. have shown that investors who are in and out trying to time markets have generally underperformed those who had a diversified long term portfolio. But that’s not even the wort part.
The worst part is the impression that if you have a low cost robo advisor that you’re all set. You may be all set when it comes to portfolio management. But for the most part, the robo advisor does not perform any of the other valuable services that a pro-active and holistic financial advisor may offer. For example, the robo advisor is not likely to ask you why you are setting up your account in your own name or joint name rather than using a trust. This is where things may get confusing, because from what I see when we meet new clients their former full service investment advisors didn’t ask those questions either.
It would then be appropriate to ask, just what services do I receive beyond portfolio management that are worth paying for? If the answer is none, and you feel that you’ll never need advice on risk management, tax planning, retirement planning, estate planning, education planning, family governance or business succession, then a robo may be the right call for you.
To me, the best part of the robo advisor phenomenon is that it is calling attention to advisory fees. The robo fees are very low, causing many to wonder what services you may be receiving from a ‘full service’ firm. If you are receiving no additional guidance from an experienced financial professional, then the difference between the robo cost and what you are paying is compensation to your advisor and profit for their firm. If you have an advisor who does offer pro-active and holistic guidance on the wide range of issues likely to be material to you, congratulations. You both know what you are paying for and have probably seen benefits that you hadn’t imagined before you retained the holistic form. Before you hire any advisor, robo or human, be sure to understand exactly what services you will receive.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.