Monday, November 9, 2015

Thoughts on Robo-Advisors

If you watch sports on TV, you’ll see a commercial with a man and his adult daughter jogging up a hill. She asks him if he is still with “that broker” and he says, “for 20-something years”. She presses if he is getting good value for his portfolio management fees. He doesn’t know.

The advertiser has a long history of trying to separate investors from good advice. Now they’re offering advice – after a fashion. It’s perfectly legal but I think his daughter asked the wrong questions.

Welcome to the world of robo-advice.

Some of the ready-made portfolios offered in the retail space these days use automated asset management. That’s been the norm for some full-service advisors for years. Now the same management process is available for do-it-yourselfers. They can save a percent a year (or thereabouts) in fees without the middleman. Advisors whose only visible contribution to their clients’ financial needs is shoveling money into a computer are vulnerable – and rightly so.

If you’ve seen my podcasts, you know I don’t use (or like) the Modern Portfolio Theory (MPT) method used by robo-advisors – discount or full-service. My view is that if you don’t have appropriate investments, what you pay for them is irrelevant.

But just this once, I’m going to side with “that broker” because:

Investment management should be the lesser component of a successful financial relationship. The more important part is advice.

Assuming you are getting – and you must be getting – exemplary personal service, an advisor must do three things that are worth many times more than the one percent or so he adds to asset management costs:

One is crafting a plan to help you get where you need to go. If you could do it yourself, you would. There are too many variables. You don’t get a lot of chances either. The people who rely on you get fewer still.

Two is adding long-term historical perspective. Your plan needs wisdom and experience. Wisdom is steadfast and boring. The people shouting for your financial attention can’t sell boring. All you get is noise.

Most critically is providing behavioral coaching in times of stress. The herd sells in panics and buys at tops. You need a deep, human relationship with an advisor to keep you on track even when your emotions are screaming for you to do anything else. A robot will never talk you off the ledge.

If the value of those three things isn’t obviously far, FAR greater than a percent, either the advisor isn’t doing them or he hasn’t explained how he earns his keep.

The daughter should have asked,

“Is that broker helping you and mom create a comfortable retirement?”

If the answer is “yes”, there is value in the relationship. If the answer is “no”, dad has work to do.

Next week I’ll get into more detail on why investors should be careful with robos.
I can’t end this without thanking Mr. Nick Murray. Nick is an advisor to advisors and I’ve been listening to and reading him for twenty eight years. A lot of what I just said I owe to his insights.

I highly recommend you visit and buy a copy of “Simple Wealth, Inevitable Wealth”. It’s a book for advisory clients explaining what they should expect and the role they play in a successful investment relationship. I don’t get paid anything for this. If you only ever buy one book on realizing your dreams of financial independence and confidence, this is it. Very readable too!

Then be sure to give it to someone you love.

Thanks for reading! 


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