Is your financial advisor operating exactly like a robo-advisor?
What exactly is a “robo-advisor?” In a nutshell, a robo-advisor is an online, automated version of a financial advisor. You visit a robo-advisor’s website, enter data about your financial life, and the robo-advisor invests your money accordingly with minimal human interaction.
Before I continue, let me make it clear that I believe there is tremendous value in working with the RIGHT advisor, but robo-advisors are cheap, and as you read on, you may find out you are working with the human version of a robo-advisor.
If you’re like me you have asked yourself, “What does a financial advisor actually do, and do I really need one?”
Before joining the industry, here is how I saw a financial advisor’s role:
Step 1 – Talk to me about my age, financial situation, how many kids I have, what I want to accomplish with my money, how conservative I am, what my life goals are, blah blah blah.
Step 2 – Punch the data into some fancy software.
Step 3 – Voila, my risk tolerance and appropriate investment allocation is produced.
Step 4 – Invest my money into some mix of funds (which have their own managers who make the buying and selling decisions), bonds, and cash accounts, and see you on some arbitrary date in 6-12 months.
Unfortunately, that’s how a huge majority of the industry operates, just like a robo-advisor. If you talk to advisors about the investment industry, you’ll likely hear some of these claims. “You need patience when investing in the stock market.” (That’s true.) “It’s good to have a person to call with questions.” (Debatable depending on the quality of the answers) “You want a person handling your money, not a robot.” (My online banking account tells me differently.) “This is a relationship business. Trust is important.” (So was the relationship between you and your CPA before TurboTax)
If you’re like me, you don’t want claims. You want meat-and-potatoes. Why do we invest in the funds we do? Why/when do we sell our positions and what do we reinvest in? That’s the crux of investing, right? Buying and selling for a profit?
In defense of their claims, don’t let an advisor tell you that the fund manager they’ve chosen has a great reputation and track record, because in their next breath they will remind you that past performance doesn’t indicate future results. Or worse, after some probing, you may find out the funds they’ve “chosen for you” are funds that earn them a higher commission but may not be your best option.
But is that the only way financial advisors operate?
Is dumping your money into some pre-determined mix of funds, bonds, etc, the only way to successfully invest? Thankfully, no, and if your advisor doesn’t operate under this model, bravo. You’ve found one potentially worthy of their fee. If not, track one down. They’re worth the hunt!
When investing, an individual has two main goals:
You either want to invest your money and watch it grow or
You want your investments to pay you so that you can live off them (or some portion of them).
So how can a financial advisor help you achieve one or both of those goals where a robo-advisor can’t?
For one, an advisor can create a living financial plan for you. Think of a yearly check up with your PCP as a physical health check and a yearly meeting with your financial advisor as a financial health check. Yes, a robo-advisor can create a plan, too, and when your life circumstances change, you can note those changes and your robo-advisor will spit out a new risk profile for you. But a financial planner can help you navigate the balance between spending enough to enjoy today and saving enough to also enjoy tomorrow. More importantly, your goals will change, and so will your spending habits, and likewise your plan will evolve. Having someone walk you through that process over the course of a few years (or decades) is a huge help, and no technology can do that the way a real person can.
Your advisor can also invest on your behalf, not in funds, but in individual stocks. I don’t love bonds or any fixed income vehicles, so I won’t discuss them now, but take a look here if you want to know my opinion. If you can find an advisor that has a clear cut, emotionless, disciplined process that determines when to buy, when to sell, and what to reinvest in, hug them close and tell them you love them.
Taking that a step further, the types of companies you invest in can mirror your personal beliefs if you so choose. This advisor can tailor your portfolio to exclude companies in industries you don’t want to support and still grow your assets or provide a growing income for you. Try telling a robo-advisor what values you hold closely and how you want that to reflect in your investment portfolio.
Having an advisor that actively manages your portfolio means that you have someone paying closer attention to your money than you ever could. At Beck Bode, we look at our clients’ portfolios every day, and we make necessary trades every month on their behalf. Robo-advisors aren’t designed to operate like that.
If you have someone who both works with you on a living financial plan while managing your investments using a clear-cut, disciplined approach to achieve the goals set out in your plan, you’ve found the mothership. Congratulations. Jump on board and don’t look back at all those years wasted with a “set it and forget it” approach. After all, your own past performance doesn’t need to indicate your future results, either.
You’ve worked hard to earn your money. Find someone who will work as hard on your behalf as you worked to earn that money in the first place.