Automated investment services, or “robo-advisors” as they are commonly
referred to, are websites that build and manage investment portfolios
determined by sophisticated, computer-based algorithms. The computerized program determines your
asset allocation based on responses to a series of questions regarding goals
and risk tolerance. It then builds a
low-cost portfolio that is periodically rebalanced back to your target asset
allocation.
Robo-advisors can be a valuable tool for young individuals that feel
comfortable working online and need a low-cost, automated solution to their
ongoing investment needs. Millennials
generally fit the target audience as they have grown up in the internet era and
usually lack the level of investable assets necessary to work with a financial
advisor.
Computer software is extremely efficient but it has some
limitations. As someone’s wealth
increases, the complexity of their lives and their finances usually increases
as well making customized advice and strategies the best path for them to reach
their financial goals. Robo-advisors are
incapable of assisting clients with intricate, personalized financial demands
such as estate, insurance, and tax planning, education funding, or robust
cash-flow projections. In addition to
their limitations in financial planning, robo-advisors also are deficient in
constructing dynamic investment portfolios that offer broad diversification
with the ability to adjust and adapt to changing market conditions. Furthermore, these programs use cash as their
starting point so they can’t accommodate existing securities clients may wish
to hold because of tax costs associated with selling them. An automated program simply doesn’t offer the
breadth and scope of services that clients with complicated situations
require.
Perhaps more importantly, a human advisor can play an important role
providing reassurance during times of market volatility, for example during the
2008-2009 financial crisis. It is easy
for an investor to let emotions take control during times of financial panic or
euphoria. Emotional decisions made under
duress often have lasting negative impacts on one’s financial future,
particularly those in or nearing retirement.
This is not to say that technology cannot be used to benefit
clients. To that point, we recently decided
to implement an automated investment platform called Schwab Institutional
Intelligent Portfolios (SIIP) for certain clients. This product is designed to efficiently help
clients with investable assets between $50,000 and $500,000 using a low-cost, diversified
portfolio of exchange-traded funds (ETFs).
The onboarding-process is done online and the platform automatically
invests and rebalances the account when necessary. Foster & Motley Investment Managers
monitor the individual accounts, in addition to selecting which asset classes
and individual investment holdings are combined into each portfolio
option.
We are
excited about incorporating this new technology and the opportunity it will
provide us in helping younger clients at an earlier stage in their financial
lives. We anticipate this program will
benefit the children of our clients, along with young professionals who are
just starting to save. To be clear, we
do not believe this automated service is designed to benefit every client as a
“one-size-fits-all” type of investment platform. It is well suited to help those clients that
are in the early asset accumulation stage of life by allowing them to access a
low-cost, diversified portfolio with rebalancing and tax-loss harvesting
capabilities. As these clients
accumulate more wealth and their financial lives become more complex our Wealth
Management offering becomes more appropriate.
Technology
in the field of financial advising has provided valuable capabilities for
investment management and financial planning and we strive to utilize these
technologies for the benefit of all of our clients. However, these advancements
don’t replace the personal guidance offered by an advisor—they enhance
them.