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Robo-Advisors - New Fad or Helpful Tool

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Automated investment services, or “robo-advisors” as they are commonly referred to, are websites that build and manage investment portfolios determined by sophisticated, computer-based algorithms.  The computerized program determines your asset allocation based on responses to a series of questions regarding goals and risk tolerance.  It then builds a low-cost portfolio that is periodically rebalanced back to your target asset allocation. 

Robo-advisors can be a valuable tool for young individuals that feel comfortable working online and need a low-cost, automated solution to their ongoing investment needs.  Millennials generally fit the target audience as they have grown up in the internet era and usually lack the level of investable assets necessary to work with a financial advisor.  

Computer software is extremely efficient but it has some limitations.  As someone’s wealth increases, the complexity of their lives and their finances usually increases as well making customized advice and strategies the best path for them to reach their financial goals.  Robo-advisors are incapable of assisting clients with intricate, personalized financial demands such as estate, insurance, and tax planning, education funding, or robust cash-flow projections.  In addition to their limitations in financial planning, robo-advisors also are deficient in constructing dynamic investment portfolios that offer broad diversification with the ability to adjust and adapt to changing market conditions.  Furthermore, these programs use cash as their starting point so they can’t accommodate existing securities clients may wish to hold because of tax costs associated with selling them.  An automated program simply doesn’t offer the breadth and scope of services that clients with complicated situations require. 

Perhaps more importantly, a human advisor can play an important role providing reassurance during times of market volatility, for example during the 2008-2009 financial crisis.  It is easy for an investor to let emotions take control during times of financial panic or euphoria.  Emotional decisions made under duress often have lasting negative impacts on one’s financial future, particularly those in or nearing retirement.

This is not to say that technology cannot be used to benefit clients.  To that point, we recently decided to implement an automated investment platform called Schwab Institutional Intelligent Portfolios (SIIP) for certain clients.  This product is designed to efficiently help clients with investable assets between $50,000 and $500,000 using a low-cost, diversified portfolio of exchange-traded funds (ETFs).  The onboarding-process is done online and the platform automatically invests and rebalances the account when necessary.  Foster & Motley Investment Managers monitor the individual accounts, in addition to selecting which asset classes and individual investment holdings are combined into each portfolio option. 

We are excited about incorporating this new technology and the opportunity it will provide us in helping younger clients at an earlier stage in their financial lives.  We anticipate this program will benefit the children of our clients, along with young professionals who are just starting to save.  To be clear, we do not believe this automated service is designed to benefit every client as a “one-size-fits-all” type of investment platform.  It is well suited to help those clients that are in the early asset accumulation stage of life by allowing them to access a low-cost, diversified portfolio with rebalancing and tax-loss harvesting capabilities.  As these clients accumulate more wealth and their financial lives become more complex our Wealth Management offering becomes more appropriate. 

Technology in the field of financial advising has provided valuable capabilities for investment management and financial planning and we strive to utilize these technologies for the benefit of all of our clients. However, these advancements don’t replace the personal guidance offered by an advisor—they enhance them.