Robots are in the news these days. The Feb. 25, 2015, edition of The Wall Street Journal reports that experts are rethinking what robots are capable of. One interviewee said robot-driven cars were just a couple of decades away. And two new movies, “Chappie” and “Ex Machina,” explore the boundaries of artificial intelligence. Could robots become investment advisors? To some extent, they already have. “Robo-advisors” are supposed to disrupt the market with technology and lower costs. The idea is to primarily rely on algorithms, instead of advisors.
In general, the “robo-advisor” is a good concept. Anything that leads to lower fees and better opportunities for clients and investors is good. But robo-advisors work best for someone in their late 20s. Here’s why: The robo-advisor is strictly about management of an account. Robo-advisors simply provide a strict asset allocation. In comparison, a human would take a strategic approach wherein they do research and come up with a set of educated assumptions as to why it’s advantageous to favor one market sector versus another at any particular time. By answering some basic investment questions, robo-advisors place you into a pre-set slot. If you are getting started with saving and investing and have a small account with a long-term horizon, then robo-advisors can keep costs in check for people who don’t need customized advice.
Robo-advisors might also be a good fit as a “bolt on” to 401(k) plans. Most 401(k) participants don’t receive the guidance they desire, and a robo-advisor could increase the availability of at least some basic advice. If, however, you’re in your late 40s or older, then a robo-advisor likely won’t be of much (or any) value. As you close in on retirement, your retirement planning ought to be supported by customized advice tailored to your current and future needs. The value of a good advisor goes beyond portfolio management and is in how well they prepare, educate and understand their client. Just like the dynamic conditions that challenge a robot trying to navigate a car through traffic, robots haven’t, yet, mastered the nuances of retirement planning advice.
Until robots do take over, you can send me your comments at [email protected]