Last week I ended my blog by asking if a client was receiving the help he needs to retire comfortably. If the answer was “yes”, that’s a good start. If the answer was “no”, I said he has work to do.
But I didn’t say what he should do. That response needs context.
The targets for discount robo-advisors are investors who currently pay full service advisors for automated money management. Most investors I’ve met couldn’t tell if their portfolio was actively managed or indexed. Discounters helpfully point out if it is indexed, why pay a middleman when they can save a percent (or so) a year by doing it themselves?
To my way of thinking; this assumes the client’s primary goal is to own a generic portfolio at a bargain price. I make the case that if he doesn’t even know what he owns, why does he own it in the first place? You invest for goals. Are these the right holdings for those goals? Maybe his advisor can answer that. That’s not a lock either but it’s the first place to ask.
I don’t use the same portfolio process as robo-advisors – either the full-service or self-serve versions. But like I said last week, personal advice matters more than which prudent asset management you use. Leaving stocks and bonds alone this time, here are two structural concerns about robo-advice I think are harmful:
The first is the enrollment process. Every packaged portfolio I’ve ever seen starts with an in-depth questionnaire about the client’s situation, objectives and concerns. Often it’s the front half of the new account form.
It is my unshakeable belief that the average investor doesn’t have the experience or the temperament to answer those questions in his or her own best interests.
That especially applies to risk.
Clients express risk emotionally. For a lot of people, market losses hurt more than gains feel good. Some are sure declines are permanent. They are sure the next drop is the big one. They can’t even open their statements. Some investors salvaged what they could in 2009 and bought gold and canned beans to survive the end of civilization.
In this business, risk is cold, hard numbers. The robo-computer has to translate that tangle of unresolved angst into a binary response. After you’ve answered enough questions with feelings, you get a canned portfolio based on your fears – not your goals.
Reducing market volatility is a tactic, not a goal.
Not being old and broke is a goal.
Putting your churlish daughter through grad school is a goal.
Whoever asks those questions needs to know your goals first so you can prioritize. In all but the wealthiest cases, there are compromises to make between what you have, what you want and what’s possible.
My second concern is that after you get your automated portfolio, you are supposed to suddenly have the self-discipline to hold it through the worst markets without any emotional support.
Ask the canned-bean investor (or his wife) how that’s working out.
One of my favorite after-school movies was Ulysses with Kirk Douglas.[i] Remember him lashed to the mast in writhing torment as the Sirens tempted him with songs of love and loss? He would have gutted his ship on the rocks if he hadn’t told his men to stuff wax in their ears and row for their lives – no matter how he begged them not to when his stress became unbearable.
The Sirens of financial entertainment sing new reasons to wreck your ship 24/7. You need experienced oarsmen to ignore them and row you where you need to be.
If the value of avoiding those just two (of plenty more) possible mistakes isn’t worth many times the cost difference between human advice and robo-advice, either you don’t need it (rare) or you aren’t getting it.
Back to last week’s blog; I hope dad doesn’t fire “that broker”. I’d like to believe that in those 20-something years, they’ve carefully planned for mom and dad to live the rewarding, dignified retirement they deserve.
I’d like to believe that for all of us. sh
The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
[i] Ulysses: All rights reserved by Lions Gate Films, Inc.
