An Online Financial Advisor – Is a Human or a Robot for You?
RoboAdvisor is a term that is used to describe an Online Financial Advisor that uses computer programs to invest assets. There is no interaction between the advisor and the investor. It is an automated investment process that is cheap, passive, and online. Personal Financial Advisors meet with you to discuss your current circumstances, performance expectations and risk tolerance. He or she will build a portfolio of securities, mutual funds, ETFs and other investments that reflect your needs and requirements.
Below is a breakdown of how Paladin Registry views these two types of “Advisors” even though one isn’t advising you at all.
|
Your Online Financial Advisor (RoboAdvisor) |
Your Personal Financial Advisor |
| Provides cookie-cutter investment options. All investors are treated the same. | Might make you a batch of cookies but mainly will tailor your portfolio to your specific needs and goals. |
| Will pool all of your assets with other investors. | Just might jump in a pool with you, but choose a different pool of funds from client to client. |
| Doesn’t even ask you what you had for lunch. | Will meet you for lunch to discuss integrated solutions, risk tolerance and your current and future needs. |
| Might have lower expenses. | Will have higher expenses but will personalize your portfolio and will have a better understanding of your risk tolerance and specific goals. |
| Doesn’t even know you are crazy. | Isn’t afraid to tell you that you are crazy to buy or sell a certain stock. |
| Provides a singular low cost solution best served for a smaller portfolio of assets. | Can tailor your costs based on the size of your assets. |
| Gives you a finite choice of ETF and Index Funds. | Gives you infinite choices with integrated solutions including financial planning, insurance and tax advice. |
| Is simply a computer managing your assets. | Is not simple work, but a human working alongside a computer to manage your assets. |
| Isn’t offering actual advice. | Is offering advice, whether you like the advice or not. |
| Leaves the ETF’s and Index Funds to be your money managers. | Can also be your money manager. |
Other posts from Jack Waymire
The gravitation toward online wealth management represents an interesting shift in the financial services industry, but the question on many consumers’ minds is whether they feel comfortable entrusting a program.
Jack, I disagree with your assessment of the so-called “robo-advisors.”
As an RIA who specializes in providing customized investment advice for high net-worth individuals and institutional clients, I applaud the efforts to get the RIA advisory product and expertise (fiduciaries) into the hands of the average investor. Yes, there are many reasons to use an RIA like mine (for many of the reasons you list above) but there is a serious need for investors than no one wants as clients — to include the big Wall Street Brokerage firms. Specifically, investors with less than $100,000 to invest. To this point, clients with smaller portfolios have not been able to afford the services of an RIA due to minimum annual fees that around out of reach for the average investor.
Although I do NOT think the WealthFront’s, Betterment’s, etc. of the world have it right yet (there are a few glaring, and very important, weakness in their models) I do, however, think they are spot on with the “concept” of delivering a fiduciary product to those who need it the most at a reasonable price.
Look no further than Vanguard who is beta-testing this very concept for their clients. John Bogle et al are visionaries and very smart people. They would not be getting into this robo-advisory space if it did not have legs.
The alternative (using high fee, hidden cost, non-transparent and conflict of interest rich brokerage firms) is much, much worse.
Great work Jack!
I don’t think I’ve seen any real breakdowns and though I get the differences, this cheat sheet is an awesome one for those who are not in the industry.
Nice work and hopefully more eyes see it.
Cheers from Manhattan,
Marty Morua