As the money management industry continues to debate the pros and cons of so-called “robo” advisors, we thought it would be helpful to address the issue on our blog. Our overall take: some advice is better than no advice.
Traditionally, financial advisors have focused on individuals with substantial wealth. Robo advisors target a segment of the population with smaller account balances, which they serve by automating investment and service processes. Software and investment algorithms take the place of people in planning and portfolio management. Advisors who feel threatened by this say that computers can never replace humans. They argue that robo advisors fail at critical moments in the investment process, particularly when financial markets appear to be going haywire, and clients need the most help in sticking to their plan.
There is some truth to this, but at Fort Pitt Capital Group, we would counter that it is always better to start people investing properly, no matter the source. If investors, particularly younger ones with the most to gain from starting early, are more comfortable investing on-line or in an automated way, all the better! As a traditional registered investment advisor (RIA), over time we’re likely to find folks like this graduating from the robo space and looking for the enhanced services we provide. As individuals build wealth, their situation evolves to become more complex. Good advice becomes more important as $10K decisions become $100K decisions. That’s when experienced advisors add value. Nuanced estate, tax and investment plans don’t lend themselves to automation.
As young investors advance and their lives (and portfolios) become more complicated, they are going to seek out the expertise that traditional advisors like Fort Pitt Capital provide. That’s an opportunity for us, and other advisors who provide comprehensive financial planning. In the meantime, we have a few tips for those seeking out a robo advisor:
- Go to the SEC website (SEC.gov) and find their disclosure document (ADV), and look for any complaints or dings on their record.
- If possible, seek out a robo that does provide some personalized advice. There are some hybrid models that offer human advisors.
- Perform due diligence on the portfolio they are recommending. Most use Electronically Traded Funds (ETFs), and not all ETFs are created equal.
- Ask friends and family who they utilize; well thought out recommendations are always a good tool.
In summary, let’s recognize how traditional RIAs differ from robos, and allow them to complement one another. Both fill a useful niche in the financial realm. Let’s build on that, not tear it down.