Where Robo Advisers Fail at Financial Planning


Where Robo Advisers Fail

These platforms can make investing simpler, but they can't give you the personal advice you really need.


In an effort to provide low-cost, technology-infused financial solutions to the Millennial generation (loosely defined as those born between 1982 and 2004), dozens of new robo adviser platforms have come to market in recent years. These platforms, much like target-date funds, promote, well, a robotic approach to managing your money, along with automatic rebalancing via proprietary algorithms based on your age, risk tolerance, goals and account size.

But can robo advisers provide you with the hands-on approach you really need?

See Also: Is a Robo Adviser Right for You?

The Department of Labor's recently released fiduciary rule, which advisers handling retirement accounts need to fully implement in 2017, will change the way we in the industry provide advice. The crux of the rule is a shift from a suitability standard to a fiduciary standard. This means that advisers are required to put their clients' best interests first, rather than recommending products or strategies that are merely suitable.

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Good advisers have always put their clients' best interests first, but this rule could have a significant impact on many insurance agents, stock brokers and annuity salespeople who have marketed themselves as financial planners.


If you work with a financial adviser, you have probably had a discussion about your risk tolerance, your time horizon and your investment objectives. The questions advisers ask you about your annual income, the source of your funds, your net worth, etc. stem from FINRA Rule 2090, known as the "know your customer" rule and are the foundation for the suitability standard.

But do those questions go deep enough to reveal what your best interests are?

Yes, even robo advisers ask you these types of questions. However, whether they have the capacity to meet the new Department of Labor fiduciary standard remains to be seen. What they already fail to provide is personal advice.

Financial planning is so much more than just risk tolerance and asset allocation. It's about informed decision-making at key life inflection points, such as whether it makes more sense to buy or rent a home. It's about projecting how much you need to save and in which type of account to achieve the goals you have for that time. It's about planning for the most tax-efficient way to transfer wealth to the next generation and knowing that your family will be secure even after you are gone. Ultimately, it's about understanding what matters most to you for your financial future and having an expert to consult with when life happens.


At our firm, we strive to understand our clients' emotional connection to money and the behavioral tendencies that affect their financial decisions. Too often, we hear from new clients that they are not comfortable with making choices about money. They are attempting to play a game with rules they do not understand because they think there is some right way to win at investing.

We teach them that what they really need to do is communicate to us what matters most to them and allow us to guide them with the tools they need to achieve their goals. We create a personal benchmark to measure our progress.

We begin the process with a brief, multiple-choice Investment Philosophy Questionnaire that we created for use during our on-boarding process. Some of the questions focus on how often clients check their portfolios; how they would feel if their portfolio posted a gain, but it was not as much as that posted by Standard & Poor's 500-stock index; how they would feel about selling positions at a loss; and whether they have faced any serious financial challenges in the past.

This exercise forces clients to think introspectively about what is really important to them as investors and helps us be better advisers. It lets us, together, set expectations and start the relationship from a shared mindset. That is what real financial planning is all about.


Do you really want a robot doing that?

See Also: 10 Financial Decisions You'll Regret Forever

Bryan Koslow, MBA, CFP®, CPA, PFS, CDFA™ is the President of Clarus Financial Inc., an Integrated Wealth Management firm with offices in NYC & NJ.

Securities and advisory services offered through Commonwealth Financial Network®, Member www.finra.org / www.sipc.org, a Registered Investment Adviser. Clarus Financial Inc., 120 Wood Ave South, Suite 600, Iselin, NJ 08830. 732-325-0456. Please review our Terms of Use.

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