Professional Advisors versus Robo-Advisors

With the rise of Robo-Advisors, I thought I’d write a few of my thoughts about the value of working with a professional Advisor, a human professional Advisor.

Certainly, I have my biases, given that I make a living on providing investment and financial advice to people. But I think the biases do not cloud the reality that many investors face.

A Robo-Advisor is basically a website that will ask you a series of questions and determine an appropriate asset mix and manage your investment portfolio for a small fee, typically about half or a third or even 25% of what a human advisor might charge. The service is limited to very little, if any, human interaction and limited to providing investment management.

There are several key services and critical values that a relationship with a human advisor provides that you cannot get from a Robo-Advisor.

First, Robo-Advisors are not in the business of providing financial advice related to things like retirement planning, education planning, estate planning, income planning, and so forth. When I meet with a prospective client for the first time, much of our discussion is centered around what they are investing for. I like to know what they want out of retirement, what their hopes, dreams, and fears are. I take this information into consideration as I construct and manage their investment portfolio. These points are often discussed and reflected when I review with existing clients. I think it is important to relate your financial standing and investment performance to your goals, not just to a series of arbitrary benchmarks.

Next, I think a very critical value I provide my clients is coaching them through market cycles. Regardless of how many conversations I have about market cycles, corrections and discipline with clients, whenever a market correction occurs I invariably spend a lot of time revisiting these points with clients and helping them stay on path. In 2008 and 2009, I recall working with clients daily to help them understand that what we were experiencing was painful, but fairly normal. Emotions will almost always lead you in the wrong direction with investing, and the fear emotion will make you want to abandon your plan in bear market. Without a human advisor, many investors are likely to walk away from the markets when they’re at their lows and cause them to miss the early and often the largest stages of recovery. If you’d sold out stocks in 2008-2009 when the DJIA was at 7000, 8000, 9000, at what point would you have gotten back in? On March 9, 2009 the DJIA hit its lowpoint of 6516. By November 2009, it was already back above 10,000. That’s more than a 50% lift in about 6 months. But as I recall, investor emotion at that time was still a state of fear and disbelief. Those investors that walked away hadn’t re-entered the market. By year end 2010, the DJIA picked up nearly another 15%, ending the year at 11,577. Following your emotions would have caused you to miss much of that recovery. Of course by today, the DJIA has continued to climb to a level above 18000, or another 50% in 5 years. I recall a series of conversations with a particular client that wanted to move her money to CDs in early 2009. I was persuasive enough to keep her on path. About a year later, I recall her thanking me for helping her not make a big mistake.

When markets get choppy or go through significant declines, I find that I become somewhat of a counselor to clients, reminding them that those climates were factored into their plans, that they need to stay on path so that we can make it to their goals. Missing negative volatility sounds great, but not if by doing so, you miss the positive volatility too.

It’s akin to taking a 500 mile road trip, that you’ve budgeted 10 driving hours for. If you average 50 MPH along the way, you’ll get to your destination in time. While you’re cruising on the interstate you may go 70 which puts you ahead of pace. But you’re gonna hit traffic somehwere, you’ll need to stop for gas, stop to use the restroom or stop to eat. If you hit traffic halfway through your travels, you don’t stop and get a hotel for the night. You endure it knowing that once you pass through the traffic, you will be able to resume your 70 MPH speed and make up the time.

The thing is, we all know this stuff. But when we’re faced with it, emotions get can get the better of us. Fear is far more powerful of an emotion than greed for most people. Since 2009, we’ve had the benefit of 6 great years in the markets. I don’t know when the next downturn will occur, simply that it will occur. I also don’t know how steep of a downturn we may see. When it occurs, surely these conversations will be occurring between my clients and me, and probably every other human advisor and their clients. Without a human advisor to coach investors through it, how many Robo-Advisor users will make the critical mistake of letting emotions guide them?

Another related element to this is how much risk an investor is comfortable taking. In March of 2009, as I asked clients questions about risk tolerance and comfort, most clients would come out with a very conservative risk profile. If I’d polled those same clients 2 years prior, many of them would have fit into a more aggressive risk profile. Our attitudes change with market cycles too. As an advisor, I find that I can extract some of that and align clients risk appetites to be more consistent to their on-going attitudes in any market climate.

Yet another value a personal advisor brings is the ability to mix in some alternative investments into your allocation such as real estate, private placements, floating rate investments, and so on. Adding some alternative investments that are uncorrelated to the stock or bond markets can give you greater dive

rsification, reduce overall risk, and add possible return to your portfolio. These types of investments can be tricky so having an advisor who understands their role can be a great added value.

As with anything in life, you pay for what you get. There is always a cheaper way to do things. Fees are one component to consider when making financial decisions. They should not be ignored, nor should they be avoided at the peril of good decision. If you trust your discipline in investing, don’t need help planning and saving for your goals, don’t need someone to coach you through market cycles, and don’t want to consider adding some alternatives to balance risk, then using a Robo-Advisor may work for you. Having worked with investors for the past 15 years, I think most of the public would benefit from having a personal guide to help them make sound investment decisions in good times and in bad times. I think most investors can benefit from getting some perspective from a human financial advisor.