Automated Investment Tools – Are They Landing in Your Back Yard?

Automated investment tools, or Robo-advisors as they are commonly known, are not aliens or robots landing in your back yard. You can’t even have a civil conversation with them.  But they are making investing easier and more accessible to individuals.

Robo-advisors create outputs based on preset options, but you need to decide whether and when to rely on these tools in making your investment decisions.

Let’s review some of the things to know to get the most out of the tools:

  1. It’s online – protect your personal info
  2. May not be right for your personal goals
  3. Garbage in garbage out
  4. What assumptions
  5. Understand the terms

Protect your Personal Info

When working with online features take precaution to protect your personal identification.

  • Don’t access through an unsecure wireless connection like a library or a computer at a hotel
  • Make sure your smart phone is password protected if you access accounts this way. Even this may not be enough.
  • Make sure the site is “HTTPS” the additional S stands for secure

Look out for scams designed to trick you into revealing personal financial information.  Unless you are accessing an account that you established, do not provide bank or brokerage account numbers, passwords, PINs, and credit card information or Social Security numbers. 

May Not Be Right For Your Personal Goals

You are dealing with a computer, it does things really well based on very specific instructions, but if you fall out of those parameters then you may lose the value that human judgment and oversight, or more personalized service provides.

For example, the system may not take into account that you need some of your investment money back in a few years to buy a second vacation home. Specifically, an automated investment tool may estimate a time horizon for your investments based only on your age.

Some automated investment tools may suggest investments (including asset-allocation models) that may not be right for you. A robo-advisor may not assess all of your particular circumstances, such as your total wealth, other investments, taxes, financial situation and needs. 

Garbage In, Garbage Out

The software asks only the questions it knows to ask. It can’t adapt like a human to your answers.  Be aware that the robo-advisor may ask questions that are over-generalized, ambiguous or just don’t fit you. You may have to speak with a person to understand the question more.

The way a robo-advisor asks questions may limit or influence the information you provide, which in turn directly impacts the output that is generated. 

What Assumptions

Software, by it nature is limited to what the person thought you needed. If you need something else this is a limitation.  The questions and output are designed to meet what the company offers.

As we know the world changes. But if the automated investment tool assumes that interest rates will remain low but, instead, interest rates rise, the tool’s output will be flawed. The Robo-advisor relies on assumptions that could be incorrect or do not apply to your individual situation.

Understand the Terms

Some sponsors get paid for the products it offers. Ask them or look for additional compensation. Learn how you can terminate the contract if it is not meeting your needs. Understand how you will be billed and what all the fees consist of.  It is important to read all the terms and the disclosures.

Robo –advisors offer some clear benefits- Simple, lower cost, and mobile accessibility. Used correctly these tools are fantastic.

You are just a click away from creating an investment plan. Is it the plan for you or what the robo-advisor thinks is you?

For more information you can access the Securities Exchange Commission on using Robo-advisors effectively.

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