In recent years, the rise of ‘Robo-Advisers’ or automated investment services has become increasingly popular. Services from firm’s like Betterment and Wealthfront offer low-cost options to automate financial investing. In reality, these processes may be too simplified; many involve easy sign-up processes, quick user surveys, and blanketed financial plans for the masses. While these services undoubtedly provide valuable insights, we caution using a one-plan-fits-all approach to personal financing decisions. In today’s post, we share four considerations for using robo-advisers.
- You get what you pay for. The commonly known adage proves true in many aspects, including for financial advice. The benefits of Robo-advisors – the ease of use, low-cost, and direct financial management – also serve as many of the largest drawbacks of the service. The most effective financial planning and wealth management services stem from a personalized approach that aims to meet investors specific goals. Using a service like Robo-advisers creates a generalized approach for investors; an approach that lacks dedicated and responsible account management from highly-trained and certified professionals. At TrueNorth Wealth, we pride ourselves in our commitment to our clients by managing accounts every step of the way. Our team of professionals has extensive experience in ensuring client’s retirement and wealth management goals are met. Our philosophy is to serve clients in a holistic approach that takes into consideration all aspects of wealth management from portfolio construction to accounting to tax advice to estate planning. Robo-advisors do not have the capability to create an all encompassing financial approach and thus the pricing structure and service often reflect those limitations.
- Rebalancing may be an issue. Rebalancing is an important step in ensuring financial plans growth with you as your goals change as you age. Rebalancing takes a look at the current breakdown of financial assets in your portfolio and ensures that throughout the year the percentage amounts invested in particular funds remain consistent with client’s goals. For example, imagine a case of someone who is risk-tolerant and has a portfolio made of 70% stocks and 30% bonds. At the end of the year, after market fluctuations, the value amounts in the portfolio may have shifted to reflect 50% stock and 50% bonds. Without rebalancing, this portfolio stay the course and can drift away from the beginning goals.Robo-advisors do offer automated rebalancing but this information is based on an initial user survey and very-influenced by user inclinations and doesn’t prevent emotional-response actions from users. For example, if you used a robo-advisor in 2009 you might have adjusted your portfolio to be heavily invested in the safety net of bonds and thus missed the rebounding stock market values. A personalized financial approach like the services provided by TrueNorth Wealth can use forecasts and institutional knowledge to more successfully hit target goals.
- Robo-advisers may be best suited for small accounts and may be used as a stepping stone to more serious financial advising. It’s not to say that all robo-advising is ineffective. The service may be especially helpful for investors with smaller asset management portfolios under $10,000 who may be new to financial planning and may lack strong knowledge in the area. Typically pricing for automated investment services is determined on a tiered basis by total asset; for investments less than $20,000 fees range from the $20-$40 per month range. Investments ranging from $50,000-$150,000 can cost upwards of $150 a month to manage. Many of the robo-advising firms offer free services to accounts under $10,000. With that said, the service has yet to prove itself as a lasting business model having just become available on the market as recently as three years ago.
- Consider the level of personal interaction you need. The majority of robo-advisors offer a hands-off approach to investing and portfolio management, which means the level of personal human interaction is often low. If you have a specific question with your portfolio, you may end up connected with a call center or automated voice messaging service to help answer your questions. Instead, working with personalized financial advisors like TrueNorth Wealth offer personalized financial advisors familiar with you and your specific financial plans and goals. You’ll connect to a real person who is passionately concerned and knowledgeable of your situation. Finding the ideal level of communication for your needs is something to strongly consider in finding a financial advising service that meets your goals.
TrueNorth Wealth is a financial planning firm based in Salt Lake City specializing in personalized financial guidance to individuals and businesses. Contact us today to discuss a more rapid wealth growth path for you.