Adding a Robo-Adviser To Your Financial Team

(Image credit: Thomas Vogel)

Popular culture often takes an “us vs. them” attitude toward technology.

Baring Your Finances to Your Adviser

Think about the menacing messages of 2001: A Space Odyssey, Blade Runner or Terminator.

Machines are bad and want to take over; people are good and must control them.

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In real life, though, technology isn’t nearly so scary — unless, of course, you’re worried a robot will take away your job.

I’m not. Though some may see the growing popularity of so-called “robo-advisers” as a threat to financial professionals, I’m embracing this method of investing as a way to further diversify a client’s portfolio and look out for his or her best interests.

Typically, when advisers talk about diversification, they mean taking a broad approach to the products we invest in: stocks, bonds and mutual funds, commodities, real estate, etc. But we also can diversify our portfolios by looking at how we arrive at our investment decisions — and algorithm-based investing offers another opportunity to do that.

It’s a complement to what investors and their financial advisers do — not a substitute. In this form of investment diversity, you have the computer, the money manager and the actual account holder all making choices, but doing it different ways.

And my clients love it. It’s probably the most popular thing we do, because it takes the emotional angst out of day-to-day financial decision making. The program we use has been around for 15 years, and we’ve been using it for three.

Taking emotions out of the way

People realize their decisions are sometimes going to be wrong. They’re often based on emotions — greed, fear, pride, regret — which can lead to buying high and selling low. And though an adviser’s recommendations are much more objective (especially if the adviser is a fiduciary), we can also sometimes miss the mark.

The computer — though emotionless and completely objective — can be wrong, too. But with three parties making decisions, we can limit the chances of everything being wrong at the same time.

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Here’s an example of human vs. robo investing:

Let’s say your favorite burger chain puts out a press release that says in the first quarter it sold more of its popular namesake burgers than ever before. You might think, “Wow! Big Jack’s Burgers is doing great. I’m going to get in on that success and buy some stock.”

That’s a decision based on emotion.

But the computer doesn’t really care how many Big Jacks were sold — after all, they could have been selling burgers for a penny, just to hit a number. The computer looks at all the data — revenue and expenses, trends and statistics. And, based on certain triggers, it might decide to buy some Big Jack’s shares, or it might decide that because other people responded emotionally, the stock is overbought and now would be a good time to sell.

Meanwhile, your adviser might suggest something completely different that’s a better, safer, less expensive way to go.

Putting robos to work for you

Two or three heads are better than one — even if (or maybe especially if) one of them “thinks” in code. Robo-advisers are largely programmed for growth, meaning they will use fancy algorithms and a computational approach to help clients grow their investments. If someone has money set aside just earmarked for growth, money they are comfortable taking an aggressive approach with, that might be well-suited to management via a robo-adviser. This approach is especially complementary to a buy-and-hold strategy with active human management, because your more aggressive investments won’t be subject to higher trading fees and will be counterbalanced by more conservative strategies that have an actual — as opposed to virtual — eye on them.

There are numerous ways for you to integrate this approach with your (human) financial adviser — perhaps this is a service they already offer, or perhaps it is a matter of giving them the ability to access and monitor an app-based or online strategy. No matter what specific integration approach you use, a true adviser has a fiduciary duty to explore the most appropriate investments for their clients. Nowadays, this certainly can mean robo-advising and the low fees associated with it. An adviser’s reluctance or outright refusal to include any robo-advised assets or their failure to otherwise research a variety of alternate options is not consistent with a fiduciary duty, and would keep them from being able to give you a true comprehensive look at your portfolio.

Will robo-advisers replace human advisers? Maybe, someday, when it comes to the investing piece of what we do. It’s efficient and effective.

But robo-investing has its limits. It can’t — or shouldn’t — perform the other tasks we manage for our clients as part of a comprehensive financial plan. Particularly for those nearing or in retirement, the kind of income, tax and legacy planning we do is essential.

Robo-investing is a tool. Or maybe, to take it a step further, a valued member of the team. Instead of fighting the future, we’re working cooperatively with it.

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Kim Franke-Folstad contributed to this article.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Michael R. Andersen is the founder and president of Andersen Wealth Management, a Registered Investment Adviser. He is an Investment Adviser Representative and a licensed fiduciary. A firm believer in financial education, Andersen holds regular informational seminars for clients and the community, and he is the host of the "Wise Money" radio show.