Have you heard of robo-advisors?


Technology is changing every industry. It continues to redefine how we live our daily lives. It has changed the way we consume entertainment, how we shop, how we travel and now how we manage our money.  Robo-advisors are the most recent addition to the changing landscape of the world we once knew. They are poised to replace financial advisors, for some at least. A Robo-advisor is an online automated wealth management service. This means you can go to one of the online providers and fill out a series of questionnaires. These questionnaires will assess your risk, your timeline, your investment goals and the like. Based on this information the robo-advisor will create a personalized portfolio just for you. The different providers will all have different features and options, but at the core this is essentially how they function.

There are some essential points to note here. The first is that this is not a fad. It is here to stay. It is a natural progression of the nature of technological development. For the client, the benefits of using this type of service are lower costs and accessibility. It is ideal for people who are just starting out on their financial journey and don’t have large amounts to invest but still want to enter the market. Robo-advisors are accessible to small investors who usually don’t meet the investment threshold to be taken on as a client by traditional financial advisors.


For the financial providers, robo-advisors allow for greater access to a larger segment of the market. The big firms usually don’t handle small clients because it is not cost effective to do so, but now they can. Robo -advisors allow these providers to service not just the larger lucrative clients, but also the less profitable (at least for now) smaller clients. The expectation is that as these smaller client’s investment threshold expands they will eventually need real financial advisors.

Perhaps it is not a well-known fact, but financial advisors have been using this type of technology for some time now.  When I was an advisor we had software which was essentially a robo-advisor. We would input all of the client’s personal and financial data and we would get a report with recommendations for the client. Then there was software that designed a personalized portfolio based on these recommendations.

Not all financial advisors have a finance background as such this technology is extremely crucial for use in house in financial companies.  It is efficient, time saving, and mostly importantly, it ensures that the client is being given appropriate recommendations. This technology not only bridges the gaps in the advisors’ knowledge, it also allows financial advisors more time to interact with the client.  Building a strong client relationship is essential for a successful financial consulting practice. More often than not, financial advisors are there for psychological support. Just knowing there is someone to whom you can turn for advice or consolation is a big comfort to clients.

Personally speaking, I never trusted this in house software completely. They are extremely powerful and accurate, but it is only as good as the information that it has been fed. For me, I used them just to get a base and then I created  a portfolio based on my client’s personality and financial goals as I knew them to be. Inevitably, I would use only one or two of the funds that the software recommended. This was a longer process, but it severed me well.

When a trusted friend became a client, I knew of her negative experience with her previous advisor. She was very hesitant to enter the market again. The software, at least then, could not take these factors into consideration. The recommended portfolio was not one that I could use for her. It did not reflect her biases because the questionnaire could not pick up on these points. Also, knowing her overall life situation, her relationship with her family helped me to design a portfolio that suited her. It also it allowed me to advise her on how to structure her overall financial life. I always used her as an example of where the human factor is important for making portfolio decisions. In the worst of times when the market was down the portfolio I manually created for her fell by less than 1%. This is compared with my colleagues who used the software to create their client’s portfolio, which fell by 30% or more.

Perhaps the software has improved over the years and maybe it’s better designed now to pick up on client’s biases. The recommendations are made based only on how you answer the questionnaire. What I have found is that people answer what they think they should, rather than what they really think. So, the result of the questionnaire may not match who they are. For instance, people like to believe that they are risk takers, especially men. However, when we dig a little deeper we realize that this may not be the case. People are adept at filling out questionnaires. They understand how they are designed so it is not uncommon to find people answer the questions to try and meet prior ideas of themselves, which may or may not be true any longer.  When a financial advisor interacts with a client it is easier to match their personality and financial goals to their portfolio.

As one’s finances and life circumstances grow, there will be the need to have a real financial advisor. The personal touch is imperative when there are complicated family financial relationships. When there are spouses, exes, step children, in-laws, residential and non-residential property, probate, life insurance. Things can get complicated and sitting down and having an in-depth discussion with a qualified financial advisor will most likely result in  an appropriately suited  plan. Financial advisors don’t only advise on where and what to invest in. They usually work closely with client’s lawyers and accountants to ensure that taxes are minimized and  wills are structured so that loved ones can get their  inheritance with minimum costs.

I totally believe in DIY, but when it comes to your money however, you may want to spend the time to get proper advice. It may be that the advisor asks a question you never thought about. Or they say something that reminds you of a potential inheritance, for instance, this will affect your future marital finances.  There are subtle nuances that a human advisor can factor in and a machine just can’t.

It is important that you can ask questions to your advisor about concepts that you don’t understand. Sure, one can Google it, but even then many read the words, but sometimes don’t really understand what it means. Here is where it is essential to have a knowledgeable advisor, one who can explain complex concepts in a very simple manner.

After all is said and done, would I recommend a robo-advisor?  Yes, if you are have just started on your financial journey and want to get the experience of entering the market, then a robo-advisor is just what you need.  When should you consider getting a real advisor? As your income and life grow, with spouses and houses and babies, you may want to talk to a financial advisor in person. In other words, seek out a real advisor before you make major life changes that will affect your money now and in the future.


As technology evolves, so too will the algorithms, I suspect, in years to come Robo-advisors would be even more sophisticated. In the meantime time, I encourage those who are just getting into the game to try it out. Those who have more to lose, it is best to find someone good and have a chat because as it stands today, your financial life is too important to put on autopilot.







Published by Dr. M Finance Blog


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