Robo-Advisors are not Robo-Planners. Yet.
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Over the past 10 years, the financial press has been overflowing with news of robo-advisory services – the early launches, the astonishing asset growth and the threat (or lack thereof) to financial advisors.
Enter robo palooza
When robo-advisors first rolled on to the scene, I was tickled to see someone automate the interrelationship between a client’s ability and willingness to tolerate risk – and then marry the two with a seamlessly allocated (and rebalanced!) investment portfolio.
And then the fees – oh, the fees you save! How could the investing public possibly resist paying 50-80% less than those greedy financial advisors charge? Not to mention the fact that some of those financial advisors were probably allocating to high-cost mutual funds instead of the low-cost ETF nirvana offered by the robos.
I am a huge fan of investment automation. One of my most cherished career roles was spent developing trading algorithms that managed client order flow at a busy broker-dealer. But I also know what it is like to work with individual investors on a one-on-one basis as their portfolio manager. In this role, solutions are highly customized and a great deal of time is spent tailoring the offering to their specific needs.
In looking at robo-advisors fairly, the investing public, who embraces it as a solution, are getting short-changed.
I’m not saying this because I think that, as an industry colleague put it several years ago, robos are just a bunch of “glorified target-dated funds.” I just think the “advisory” moniker is inaccurate.
Where robo-advisors fall short
Clients are best served when provided unbiased, unconflicted and complete advice delivered by a well-qualified fiduciary (a professional required to place the client’s interests ahead of his/her own). Robos (notwithstanding high mandatory cash holdings at some) do deliver on some – but not all – of that value proposition. They are investment advisors only.
Here is the bigger issue: Investment management is not financial planning.
A family cannot button up their entire financial well-being via a 15-minute online survey and a couple online signatures. Proper and complete financial planning must take into account a myriad of other questions such as:
- What do we keep? (Taxes)
- When do we protect it? (Insurance)
- Where does it all end up? (Estate)
- How do we get there? (Integrated Plan)
Robo-advisors fail to answer the four critical questions above – mainly because it is first and foremost an investment management solution.
I challenge you to find someone served completely by a robo-advisor. I’ll even provide you a few examples:
Filling In the gaps with robo-planning technologies
So, if I have convinced you that robo-advisors are, at best, a complete solution for very few, and at worst, a mirage of comprehensive planning, I would like to close on a promising note.
There are elements of the unanswered questions that are ripe for both automation and integration.
Yes, I believe that financial planning can be viably automated and integrated in such a way that brings true comprehensive financial planning to the masses, in a format that is cost-effective and meets the fiduciary standard.
I am not proclaiming the death of the financial advisor value proposition. I see complicated financial situations daily that could not conceivably be addressed by even the most advanced programs and algorithms.
Here’s what I am saying: There are large swaths of the financial planning landscape that can – and should – be both automated and integrated in such a way to which robo advisors aspire, but do not yet currently deliver. I say this from the perspective of someone who has worked exhaustively over the past decade to deliver best-in-class integrated solutions to clients across the spectrum of planning needs.
I, for one, am excited to begin building such technology, and welcome like-minded advisors and technologists to join me in drafting a solution that is truly capable of improving the complete advisory value proposition.
Carl A. Friedrich joined FCE Group in 2014, and serves as senior managing director. Carl is a CFA® charterholder, Financial Risk Manager (FRM), Enrolled Agent (EA), and Certified Financial PlannerTM Professional (CFP®). FCE Group is a Long Island, New York-based independent, fee-based, client-focused wealth management, investment advisory and financial planning firm.
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