As with every aspect of life, technology has significantly evolved in the area of financial advice. Today, individuals can choose to work with a human financial advisor or a robo-advisor. Robo-advisors are a positive development in the financial advisory world because they make investment advice accessible to more people. However, they’re not always the best fit for your financial needs and goals. Here we discuss how to determine whether a robo- or human advisor is the most strategic choice for you.
What Are Robo-Advisors?
Robo-advisors are online financial advisors that provide investment and financial advice through mathematical algorithms and models. The program uses information that you provide to build out and manage an investment portfolio. Because of the minimal human interaction they offer, they tend to have low management fees and typically no minimums. Some robo-advisors aim to help you set financial goals and to meet them through cash management and guided investing.
When Are Robo-Advisors a Good Choice?
Robo-advisors make basic financial advice more readily available to consumers. This makes it easier for people just getting started on their financial journey to receive guidance that previously was hard to obtain. Many people want to build an investment portfolio or receive professional advice on their financial plans, but they don’t meet the minimum assets required of many financial planning firms. Robo-advisors make financial planning services more budget-friendly.
Individuals and couples with straightforward income and expenses can benefit from the automation that robo-advisors offer. To get started with a robo-advisor, you answer a number of questions about your finances. For people not used to working with a budget or unfamiliar with their income and expenses, this exercise is a useful opportunity to better understand your financial health. The robo-advisor program then builds an investment portfolio and a budget based on the information that you provide about your current assets, liabilities, and long-term goals.
Additional online services can enable you to automatically deposit some of your earnings into a savings plan, can alert you when your balance is getting low, and can give you a clear report about your monthly cash flow. These are important building blocks to building long-term wealth.
A word of caution, however. When using a robo-advisor, the accuracy of all input is incumbent upon you. The quality of the advice you receive is only as good as the validity of the information you enter.
When Only a Human Advisor Will Do
While robo-advisors have their benefits, there are limits to what they can do. As your finances grow and become more complex and your lifestyle changes, working with a human financial advisor might be the most strategic fit for you. There are many aspects of investments, financial planning, and wealth management that are difficult or impossible for a robo-advisor to duplicate or take into account. We discuss a few specific instances where having a personal financial advisor is often in your best interest.
Complex Financial Situations
If you own property, run your own business, have multiple retirement, bank, and investment accounts, are raising a family, receive an inheritance, or have any other complex aspect to your finances, it is essential to have the guidance and expertise that only a human wealth manager can provide.
A well-trained and experienced advisor can appropriately address the intricacies of your finances. These might include:
- Careful and accurate review of cashflow, a key driver to planning
- Appropriate tax treatment for income, expenses and transactions
- Varying inflation assumptions
- Varying market environments
- Detailed rental property information, such as depreciation schedules
- Charitable giving strategies
- Wealth legacy objectives
- The timing of decisions relative to financial benefits
- Real estate transactions
- Opportunistic strategies, such as multi-year tax planning
Meeting Short-Term and Long-Term Goals
Human financial advisors are obligated to take a comprehensive approach to your wealth, ensuring that your investments and finances are working toward common goals. Client goals are often competing (desires now versus goals long-term). Human dialogue and discussion can help prioritize objectives as they relate to your finances.
Understanding You and Your Finances
Not everyone’s life, goals, family, aspirations, and personal approaches to money can be built into computer algorithms. An experienced advisor can integrate human and financial elements of your decision-making. Only a human advisor is capable of engaging in discussions about the pros and cons of various options with their clients, working through questions and weighing the best strategies.
Investment Management in Down Markets
Investors often become anxious in volatile and down markets. Thoughts of pulling out of the markets to reduce risk are common. Advisors tend to receive increased client inquiries during these times. Though robo-advisors tout their rebalancing and investment management skills, many times, a human conversation about the markets, your individual financial needs, your long-term financial outlook, risk mitigation strategies, and actions being taken on your behalf can help frame appropriate decision-making. When it comes to your finances, it’s always best to make decisions based on sound strategy versus emotions.
Personal Updates and Life Events
An important aspect of human advisors is the continual hands-on approach. Advisors are in regular communication, enabling proactive advice versus reactive decision-making. We ask for life and financial updates along the way and incorporate any changes into the client’s long-term planning projections.
The availability of robo-advisors certainly offers benefits, filling a prior void for many consumers. While they are appropriate for some individuals, they are not universally appropriate for all.
At SageVest we strive to implement a comprehensive wealth management approach. We consider all aspects of your financial life and integrate them into recommendations specifically designed for you and your family. Our recommendations are proactive to help you meet your short- and long-term goals, while integrating the two. Please contact us if you would like to learn more about our comprehensive proactive approach and how we differentiate ourselves.
