Finding the right investment advisor can be a tall order. After all, it can take a lot of questions, a fair amount of due diligence, and a little bit of faith to feel ready to trust someone with your nest egg. That’s why some people think working with a robo-advisor, a computer algorithm that makes investment recommendations, may be the answer.
Very often, people in this situation realize that most of their encounters with “financial advisors” were with financial product salespeople, as opposed to those who operate as a fee-only fiduciary (i.e. those who are compensated only for providing financial advice, and compensated only by their clients).
While working with a robo-advisor does have some perks for those with limited needs and who don’t need personalized service, it leaves many others feeling unsupported and confused.
You may do well with a robo-advisor if you:
Don’t need to talk to anyone about developing a financial plan
Don’t seek advice when investment market conditions change considerably
Don’t want context about why certain financial decisions are being made
Don’t want to know “why do I own this investment?”
Feel OK delegating the management of your portfolio to a computer algorithm, written by people you’ve never met and won’t ever get to talk to in order to understand it.
On the other hand, if you’re someone who wants a higher level of more personalized service, it’s worth considering a fiduciary investment advisor. There are many components of a thoughtful financial plan you’ll get from an investment advisor that a robo-advisor simply cannot provide:
Personalized advice
Just like people say “all real estate markets are local,” all finances are personal. Any investment advisor worth his salt will take a highly personalized approach to managing your assets. This is because financial advisors understand that life is about choices, and what’s most important to you may not necessarily be what’s most important to someone else. They’ll ask questions and aim to deeply understand your financial goals, fears, and challenges.
In contrast, a robo-advisor is like a blunt instrument uniformly applied to address all of your most important financial challenges and goals. Because of the lower-cost model of robo-advising, customers get more generic advice without the same level of service and advice that an investment advisor can provide. With little (if any) client-facing human contact, the robo-adviser business model is highly attractive to the service provider (i.e. unlimited scale with few employees).
Context for “why”
Crafting an optimal financial plan is part art and part science. Even with the best financial advice, you’ll still likely have questions. For most people, it’s essential to have one-on-one communication with an advisor and to be able to ask questions so that you get comfortable with the recommendations.
It’s also important to understand why your portfolio is behaving how it is, especially within the context of the broader market. Being able to get the context behind what’s happening and why certain decisions are being made can make all the difference in terms of having confidence in your investment strategy.
Questions as simple as “Does this decision really make sense?” or “How does this decision support my financial goals?” seem fairly benign. However, having a trusted professional on your side is highly valuable because the key with all large financial decisions is to understand their implications before you make them.
Compromise & navigating difficult topics
The hard truth is that talking about finances can be emotionally tumultuous at times. Even in the best marriages, it’s seldom that both partners see completely eye-to-eye on every single financial decision. That’s why it can be so useful to have an investment advisor as an unbiased third party for navigating difficult topics.
A good advisor can also help you reach suitable compromises that help both partners get what they want/need. The role of an advisor is to identify what matters most to you, and then develop and implement a plan to achieve that over time. Large financial decisions often have long-lasting effects on most (or all) members of a household, and no robo-advisor will ever be able to factor in the reality of human emotions when making big financial decisions.
Robo-advisors: low cost, low service
Robo-solutions are to personal finance what most urgent care facilities are to personal health. They are there in a pinch to treat immediate symptoms, but seldom provide complex diagnoses to treat and remedy your most important issues. For many people, by the time they’ve identified the need for help, they’ve already outgrown this level of service.
Ultimately, it comes down to the level of service that you’re looking for. And in most cases with a robo-advisor, lower fees simply mean no service. At Paceline we believe in providing personalized service, and that if you are seeking unbiased financial advice it makes sense to work with someone who isn’t paid to do anything else.
To speak with a Paceline advisor, or to get a free, no-obligation second opinion on your portfolio, please contact us today.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.