Financial Planning

Should You Hire or Fire Your Robo Adviser?

Robos have come a long way, and they do serve a purpose for many investors. But when the markets are going crazy, there's a distinct downside to consider.

When it comes to investing, everyone wants to increase their gains. One way to do that is to keep your fees low. Obviously, fees are counterproductive to wealth building, so there is a trend in the industry that labels fees as evil.

While it is true that fees dampen returns, they are not the end-all and be-all. Investors who focus on fees alone could be missing the point of investing itself (more on that in a bit). Regardless, many young and old alike are turning to robo advisers.

The Pros of Robo Advisers

Robo advisers are an algorithm-driven financial alternative to human advisers. They offer investment management at an average cost of 0.15% to 0.5%. Now compare that to a mutual fund, which can often have fees of 1% to 2%. Couple that with the fees from an investment adviser, who may charge another 1% to 2%, and it appears robo advisers have the upper hand on low investment fees. They really are a very low-cost way to manage money.

In 2008, just after the financial meltdown, robo advisers made their mainstream debut. While the technology had been used by wealth managers and financial advisers for years, it had never been used by the public prior to that.

Initially used to rebalance within target date funds, robos have come a long way. They now allow investors to go more in-depth in their investment management, help alleviate tax losses and even aid in investment selection. Robo advisers aren’t going anywhere anytime soon.

Where Investors Can Go Wrong With Robos

So, with robos here to stay, should you fire your human adviser in an attempt to increase your gains by lowering your fees? Here’s the thing: When it comes to investment management, we could look at fees and focus on that number. However, we’d be missing the point. Our end focus should be on the returns, not the fees. Let’s look at the robo adviser vs. a human adviser.

The president of Condor Capital Management, Ken Schapiro, decided to test robo advisers' performance. He invested the same amount at several robot trading companies. He answered each of the robo advisers’ questions with the same investor profile in mind, leading to moderately aggressive portfolios, and invested through 2016. Interestingly, there was a more than 5 percentage point performance difference between the robos. They returned anywhere from 5.5% with Vanguard to 10.75% with Schwab.

So, if you’re looking to cut costs, sure, robos clearly offer a lower-cost option than hiring a human adviser. However, with that much performance variance, it is also clear that just because you pay less in fees, doesn’t mean you’ll necessarily get the best return.

So this assumption that low cost is automatically going to yield a better reward just isn’t any more accurate than saying a high cost is going to generate a lower reward. You always have to be careful of generalizations when it comes to dealing with the marketplace.

Will Robos Stand the Test of Time?

The most prominent caveat I see to using a robo adviser is the lack of research on their accuracy thus far. Since their inception, we haven’t really experienced a negative market; it has steadily been climbing for the most part ever since. So that makes predicting how they will perform in a bear market impossible. We can, however, look to Brexit and the market crash of 2018 for some indications.

Know that if you choose to use a robot only for portfolio management with absolutely no human interaction whatsoever, you have to realize, that robo’s do not and cannot deal with current real-life situations at this time.

For example, on June 24, 2016, Betterment, one of the largest robo advisers, actually halted trading in all its accounts for about two hours. That was the day after Brexit, and turmoil was in the air. On the other hand, some human advisers and even some other robos went in and rebalanced portfolios in case of a market downturn. However, Betterment just stopped trading altogether for those couple of hours, causing its clients to lose all control of their assets.

Additionally, on Feb. 5, 2018, the market took its largest dip more than six years and the greatest single day point drop ever—robo advisers did not respond well. Both of the largest robo sites available crashed that day.

When a Human Comes in Handy

From a human perspective, I’m somebody who deals with robo-advising (I use and manage robots for some clients) and advising with actual human interaction. I can tell you this: You will often be better served from a human adviser if you have a good quality adviser who you listen to when the markets take a downturn. When stocks start dropping and things look bleak, a human adviser is going to do what a robot can’t. They will sit down with you face to face, calmly talking you through the roller coaster of volatility overwhelming you. A robo adviser can’t help you logically think through the knee-jerk reaction that could harm your overall financial goals and well-being.

In effect, by hiring a robo adviser, yes, you may save on the fees. Even so, you won’t have that human interaction; that adviser who meets with you and does a risk analysis, making sure your portfolio is pointed toward achieving your goals. A true financial adviser will evaluate your risks and calm you down when turmoil surrounds you.

The average do-it-yourself investor grossly underperforms the market. According to a study by financial services firm DALBAR, managed investments from 1990 to 2010 had a return on investment of 7.81%, while the average investor going the DIY route, earned 3.49%. Now, will the professional guys hit home runs every year? By no means. However, they can keep you accountable as you work toward your overall plan.

Is a Robo Right for You?

So should you fire your investment adviser and hire a robo adviser? Or perhaps would you do better to fire your robo and hire a professional?

First of all, how complicated is your life? If you’re just an employee with a 401(k) and maybe a small IRA rollover, meaning there’s not a lot of money involved, and your life is pretty straightforward financially, then you may be an excellent candidate for a robo adviser.

On the other hand, if you’re someone who deals with tax issues and you’re trying to hit specific goals, then you may be better served with an actual human financial adviser. Someone who can listen to what you’re saying and offer you broad-based guidance.

So, the bottom line is this, if you’re just looking for pure asset management and the rest of your life isn’t very complicated, you have no room for improvement, then yes, you are a good candidate for using a robo adviser to reach your investment goals. On the other hand, if you’re just getting started in life and you don’t know a thing about finances, a good financial planner has much to offer. This knowledge may allow you to avoid major catastrophes in your financial life. A robot just can’t do that.

There are pros and cons to both choices. Is one better than the other? That is contingent on your particular situation.

All information has been prepared solely for informational purposes. Not meant to be investment advice pertaining to your particular situation.

Advisory services are offered through Heritage Investors, LLC., a Registered Investment Advisor. Registration is not an endorsement by securities regulators and does not mean the advisor has attained a particular level of skill or ability.

About the Author

Justin Goodbread, CFP®, CEPA, CVGA

Chief Strategy Officer, WealthSource Partners

Justin A. Goodbread is a CERTIFIED FINANCIAL PLANNER™ practitioner and an adviser with WealthSource® Knoxville. After years of working in a large firm, he ventured out on his own in 2009, starting Heritage Investors, and eventually joining WealthSource® Partners LLC in 2022. As a serial small-business owner, Goodbread has bought and sold multiple businesses. He uses this experience, along with his continuing education, to help business owners grow and sell what is often their largest asset. 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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