Where do investment roboadvisors fit?
Based on the press, it would be easy to assume they will replace all investment advisors. The good question is, should they? Not likely, but they will certainly have a place.
Some of the places they will fit are obvious.
- People who are just beginning to save. Easy to do, easy to manage, easy reporting and an advisor at hand to deal with questions and likely send newsletters or other relevant material.
- Part of a larger portfolio where people want some low priced passive investments.
- Portfolios where the people are not trying to trade for profit. If you want to trade the news or the latest rumor, some derivatives will work better. Most ETFs, the roboadvisor product shelf, are for patient people who do not see the investment part of their life as the excitement.
- They will likely work to keep a portfolio appropriately diversified.
They don’t fit everywhere. Here’s why.
Investments are just part of financial planning. While the impact of fees can be exaggerated, the other values received from a conventional advisor are valuable. The robo-model won’t be providing them.
Many people need help with the arithmetic to create a long term financial plan and a short term budget. All of them need help to record outcomes, review the implications of those outcome, and revise the course based on what they have learned.
Many people need help with product issues like life, disability, critical illness, long term care and group insurance. They need help with estate matters like form and substance, wills, powers of attorney, and executors. They need help with allocations to the various containers like RRSPs and TFSA. They need help with decisions like invest or pay down debt. People need help with income taxes. Roboadvisors do not yet go there.
People need help with asset ownership issues. Personal, corporate, trust, inter-generational?
People need help with discipline and their emotions when the world conspires against them. Most people need a conscience when some hare-brained idea comes along.
People need a communicator. Between spouses and perhaps with children. Someone to convey detail to advisors like accountants and lawyers.
Roboadvisors represent the macro investment world. As discussed recently, people are individuals. Their micro-world may not closely match the macro algorithm in the robot. All will, some of the time. None will all of the time. People may need help sorting out their own uniqueness and devising ways to optimize.
Roboadvisors are coming and financial advisors should look forward to that day.
Every business works at product differentiation. Financial advisors are no different and now they have a foil. In the long run, roboadvisors will turn out to produce mediocre results. Perhaps that is good enough.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772