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Holistic financial planning

Most robo advisors can't provide truly tailored and holistic financial planning services for their clients. “Investing in low-cost ETFs, rebalancing and tax loss harvesting are excellent strategies for managing a portfolio,” says Elwell. “But what about the bigger picture topics like defining goals, determining how much you should be saving to meet those goals, and choosing which type of account to use?”

While robo advisors can help you make some tailored decisions, based on your reported risk profile, and by using rules of thumb related to asset allocation, they can't sit down with you and get into the details. Your robo advisor can't help you decide what you should be setting aside each month if you want to be able to travel the world during retirement in 10 years.

Additionally, Elwell points out, there are other aspects of investment and financial planning that robo advisors can's help you with, including:

  • Whether or not you should use a tax-deferred or tax-free account
  • How to structure your estate
  • Help plan your insurance needs

“Investing is just one piece of the puzzle,” Elwell says. “People need all the pieces to the puzzle which is a completely financial plan that includes addressing many things outside of investing.”

Of course, even if a topic isn't exactly investing, it still relates to investing, especially as one's assets grow.

Following rules of thumb work great for simple financial situations, but once things become more complex, including long-term tax planning, business investing, and other items, robo advisors are no match for a human who can really look at your situation on an individual basis and help create a holistic financial plan.

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Keep calm and carry on

Another concern that Elwell has is the ability of robo advisors to keep their clients calm. “I'll be interested to hear how clients of robo advisors react when the markets decline like the did in 2008,” he says. “Will robo advisors be able to keep their clients invested, and help them avoid selling out in a panic?”

“I'm concerned that people will not find a website, computer, or software program reassuring when their portfolios have fallen 20 percent,” Elwell continues. “Managing investor behavior and avoiding mistakes are some of the most important services an advisor offers.”

Of course, not all advisors are perfect, and they can make mistakes as well. However, the ability to turn to your investment advisor and talk through the market troubles, and re-establish your plan, can keep you from selling low.

Indeed, many investors ended up caught up in panic-selling following the 2008 financial crisis. They got out of stocks at a low point and didn't get back in until stocks were already on the way back up. They locked in losses and missed out on a lot of the gains of the last three or four years.

Elwell isn't sure that robo advisors can prevent that type of panic selling since many of these applications function similarly to self-directed investment moves made via online discount brokers.

Are robo advisor algorithms right for the future?

James Juliano, a founder and partner at Kairos Capital Advisors, a Registered Investment Advisory, has his own concerns about robo advisors. While he agrees that robo advisors aren't going to be as personalized as actually talking with a person, he's worried that the assumptions underlying the portfolios constructed by robo advisors no longer hold.

“Robo advisors are dangerous because they are based on assumptions that may once of been true but clearly are not now,” Juliano says. “The primary assumption is that as you age you should reduce risk. The implementation assumption for robo advisors is that in order to reduce risk you sell stocks and buy bonds.”

Juliano takes issue with this basic assumption, and insists we are approaching a new financial reality in which some of the old rules of thumb no longer apply. “Bonds only do well in those brief moments when there is low growth and less inflation,” he explains. “Stocks do well when there is growth. If the future looks like the high-growth, low-inflation 1980s and 1990s instead of the low-growth, high-inflation 2000s, then bonds may be a very risky asset class.”

If Juliano is right, and interest rates normalize toward 5% due to stronger economic growth, he sees robo advisor algorithms placing risk-averse or aging investors heavily into bonds down the road — putting client wealth at risk. “Rules of thumb, like age and risk-based asset allocation used by robo advisors, are used by the investment industry to make sales easy for untrained sales people.”

Instead, Juliano thinks investors need to look beyond the current trends, and move away from algorithms based on current ideas of asset allocation related to age-based risk profiles.

By looking at more personalized risk factors, and considering the way things are changing, and taking advantage of other asset classes, it is possible to put together a portfolio better prepared for the future. “Investing is not as simple as knowing what year you will retire and choosing a set and forget strategy,” Juliano says.

Elwell thinks there's room for robo advisors, but that it's important not to put too much faith in them. “Robo advisors will gain clients and will maintain a place in the investment world, much like Nolo.com helps people create wills and TurboTax helps people file tax returns,” he says. “Those with relatively simple situations will find robo advisors very useful. Those with complex needs will be better served by personal advice from experts who tailor advice to particular situations and needs.”

If you need help finding a personal financial advisor, check out this tool from SmartAsset. It's a questionnaire that will help pinpoint a few advisors who might suit your needs.

There's also the registry from our friends at Paladin Registry. This service can match you up with pre-vetted advisors in your area.

What's your take on robo advisors? Are they the future of the investment world, or something more of a vanity addition?


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Miranda Marquit Freelance Contributor

Miranda Marquit is a journalism-trained freelance writer and professional blogger specializing in personal finance.


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