There has been a lot in the press recently about new automated online “robo advisor” services that help people design and implement investment programs.
The greatest value of these programs, which charge only 25%-50% of the fee typically charged by human advisors, is that they make it easy and inexpensive to construct a well-diversified portfolio.
But diversification alone does not make for an appropriately-constructed portfolio. A person with a globally-diversified stock portfolio would have experienced a more than 50% drop during the 2008-09 Great Recession.
The biggest factor affecting investor performance is how much of a well-diversified portfolio is allocated to stocks versus bonds versus other categories of investments. Robo-advisors also help people make that decision, by allowing people to see in real time the anticipated volatility and growth potential of different blends of stocks, bonds, and other investment categories. Time will tell if these new automated services will become popular.
Polls suggest that a clear majority of investors, even young ones, want to interact with a human when it comes to managing their investments. One of the most important services we provide at McKinley Carter is helping people moderate their assumptions that the markets are going one way or the other – research clearly demonstrates that investment returns suffer when investors focus on certain developments that cause them to feel especially pessimistic or optimistic. See also, Political Party Affiliation Impacts Return On Investment, For Better and For Worse.
The best possible result, in my opinion, is that people who use robo-advisors will take the time, energy, and money they used to spend on investments and re-allocate those resources to managing aspects of their financial situation that have an even larger impact on their long-term financial situation: spending, saving, career, business, taxes, risk management, etc.
Though there are also online technologies to help people manage this broader constellation of financial concerns, most people benefit from the leadership, coaching, and logistical support that comes from having a professional who really understands their unique combination of issues, opportunities, values, and goals.
For more reading on the value that financial advisors can provide as personal trainer, administrative assistant, or source of conversations about what it means to live a good life, you can take a look at a piece I wrote several years ago, long before robo-advisors were the buzz.
