The term robo-advisor seems like something out of the Terminator movie franchise, where instead of searching for Sarah Connor the human-cyborg offers killer financial advice. Somehow, we don’t see Arnold agreeing to this role.
Here in the real world, however, robo-advisors are gaining traction with investors. Even LPL Financial, our affiliate broker/dealer, announced plans to launch a robo-advisor program later this year, though the platform is directed at advisors rather than investors.
But what is a robo-advisor in the first place, and does it really impact you?
What is a Robo-Advisor?
A robo-advisor is essentially an online wealth management platform that provides automated portfolio management advice based on algorithms. Oh, and it’s done without the intervention of human financial planners.
Isn’t the point of financial planning that you get help from a person?
Well, yes, at least to those of us who have been around for a while. Robo-advisors were created to attract younger investors who already complete other types of financial transactions online. In other words, those investors who are comfortable with handling money online. The automated platforms generally serve investors looking for low account minimums and low service costs, too.
By now, you may be wondering if robo-advisors are a good thing or a bad thing. The answer is, it depends on who you ask.
As of December 2014, robo-advisors in the U.S. directly managed about $19 billion in assets, a 65 percent increase from April 2014 (Corporate Insight). We can possibly take this as a signal of confidence from investors who increased their use of robo-advisors. On the other hand, some see the technology falling short. Paul Resnik of FinaMetrica, a risk profiling firm, says “The problem with robo-advisors…is that they don’t properly calculate a client’s risk tolerance.”
Either way, robo-advisors appear to be here to stay, if only for younger generations. We believe human financial advisors aren’t going anywhere either, especially as financial planning and investing tends to be a highly emotional transaction best handled with the human touch.
– The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
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