Robo-advising has become very popular because of the very low fees typically associated with this automated service. I believe there is some merit and a place for Robo-advising. There are just some concerns that I have regarding Robo -advising, first being, we really have not seen how the robot handles a fast-moving downward market or an elongated bear market. I can see Robo -advising being used by young people with a very long time horizon in the markets that are just allowing the robot to rebalance their portfolio and to make algorithmic choices for their money. Where I don’t believe Robo works well is for someone inside of 10 years of retirement or doesn’t like equity market risk. As we get closer to needing our assets for income, or simply do not have time to recover from a correction in the equity markets, then an advisor that is skilled at structuring steady, sustainable and reliable income that mitigates market risk, sequence of return risk and longevity risk can be invaluable.
I have seen many portfolios that were good candidates for Robo advising. Typically, these portfolios were made up of a family of mutual funds with attached commissions and 12 b1 fees sold by “advisors” who did not take the clients best interests into consideration, but sold funds that their firm was paid to promote. In this instance this clients’ money was being passively managed through high cost mutual funds whereas the robot could have done a better job for less fees. I guess what I’m saying is that given the choice of a robot or a typical broker connected to a firm or bank, I might choose the Robo as well. Client money must be managed with the client’s best interest first, but can only be done by an advisor who really understands how to manage that money for their client’s needs.
As I mentioned earlier, we have not really seen how the robot reacts in tough market conditions. The last eight years has seen a couple of bumps but not any major drawdowns in the equity markets. So, complacency is at an all-time high and money will chase a market nearing a top. Studies also tell us that investors will start to sell near the bottom. A robot will not have an opinion on the direction of the markets, if you should hedge, if you should raise cash levels or start to shift money over to bonds, fixed income or precious metals. It is a good thing that the robot takes your emotions out of the equation, but I’m not so sure that taking a qualified advisor or asset managers emotions, skill and knowledge is a good thing. Time will tell. Robo advising may work for you if your time horizon long and you don’t mind market risk in the equity markets or it could work for a portion of your portfolio that is designated for growth but you will not need for income in the next 10 years.
A good asset manager can manage your money using modern portfolio theory and very low fee investments that are designed to maximize your returns and minimize your risk. Compare that to the low fee robot. It is all about net returns and risk.
Mark Patterson is Chief investment officer with MHP Asset Management and can be reached at (603) 447-1979 or mark@mhp-asset.com.
