What is a robo-advisor?
Robo-advisors are web-based financial applications that offer to make investing easy, inexpensive, and even fun. They start with an online questionnaire, apply one of several asset-allocation models, and offer index-based buy-and-hold portfolios using low-cost Exchange Traded Funds. They also rebalance the portfolio periodically, and can sometimes do tax-loss harvesting. Their fees are low, and they’re fully transparent. What’s not to like?
One issue is the nature of their “advice.” They don’t really offer any. Their service model is built around a few questions, your age, and income. These businesses have only been around during the latest bull market. And during a bull market, everyone feels good. But even experienced and aggressive investors get antsy when their portfolios are down 10%–and have been known to get conservative at just the wrong time.
Source: South Park
People like to talk to people. There’s a reason why Apple has Apple Stores, rather than just selling their devices online. People especially need to talk to knowledgeable people when things go wrong. A text-box or live chat doesn’t calm my nerves very much when I’m facing significant losses. So I’m much more likely to panic at just the wrong time.
Shakespeare notes that to be honest in this world is to be one in a thousand. It goes double for web-services. In a world of flash-crashes, financial crises, bubbles, and negative yields, it helps to know someone who has seen it before.
Human nature doesn’t change. There will always be new, new things. Robo-advisors may be cheap, but sometimes the cheapest things end up costing the most.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!