In my last article, I addressed what robo-advisers do right. In general, robo-advisers provide investors who have any size portfolio the opportunity for convenient, low-cost, tax-efficient investment management. No matter the shortcomings I might mention in this article, this egalitarian offering opens the door for all to invest.
Online automated investing, although easy, is not the same thing as comprehensive wealth advisory services. For those looking for more than just account-level “multiple choice” investing, there's not a substitute for a financial adviser. Of course, I am biased (so no need to point that out in the comments!), but I also think I have points to back up my opinion. Here's what robo-advisers can't do:
• Develop a customized financial plan that addresses not only investments, but also cash flow, detailed retirement planning, insurance needs, college funding,
estate planning and tax planning. An appropriate investment plan is best achieved when looking at the entire situation, not just a quick risk-profile survey.
• Save on taxes by investing on the “household” level. Investing account-by-account makes it easy to track, but it ignores perhaps the largest tax-savings opportunity: location optimization. By managing all of an investor's accounts as one portfolio, the adviser can place less tax-efficient investments into the client's individual retirement account and hold more tax-efficient investments in the taxable account. That way, for example, taxes aren't immediately payable on bond interest held in the IRA, and appreciating stocks held in the taxable account will ultimately be subject to capital gains rates, rather than ordinary tax rates if held in the IRA.
• Be there for advice and hand-holding on a personal level. A personal financial adviser can answer questions like “What happens if I sell my house this year?” or “Should I buy or lease my new car?” When the market is going crazy, a personal financial adviser can reassure and relate impacts to the particular client's situation.
• Help clients achieve all of their goals, not just investment goals.
(More robo insights: Are there too many robo platforms crowding the market?)
Of course, depending on the adviser, clients might also get “one-stop shop” services, such as tax return preparation or insurance.
There is a price for advice over and above the built-in costs of investing. It's a choice that each investor can make based on specific needs and wants.
I, personally, use the services of an attorney to prepare estate documents rather than filling out downloaded forms from the internet. I also pay for compliance consultants instead of using an online solution.
Then again, I might go for a hybrid approach — looking up my symptoms on the internet while still going to a doctor. For me, personal interaction with a trusted professional is imperative.
Sheryl Rowling is head of rebalancing solutions at Morningstar Inc. and principal at Rowling & Associates. She considers herself a non-techie user of technology.
