• Brent D Dickerson CFP® EA

Don’t Fear the Robots

I recently took a survey regarding the current and future state of the financial advisory industry. One set of questions dealt with the advent and propagation of what has become known as the “robo-advisor.” You may have seen commercials for a few robo-advisors on TV or internet. The more prominent of these robo-advisors in the individual investor market are Betterment (www.betterment.com) and Wealthfront (www.wealthfront.com), and there are a-half-dozen more that are not as well known in the marketplace. The big hub-bub right now is that many investment advisors are going to lose their jobs to these computer programs, but I’m not concerned. Why, you may ask? I’ll explain after I give a brief overview of what these low-fee automatons do for customers.


Photo by Rock'n Roll Monkey on Unsplash

Robo-advisors work by asking an investor a few questions about what they look for in an advisor; such as: diversification, tax efficiency, market outperformance, etc. The system continues by requesting other relevant information like age, income, marital status, number of dependents, amount of liquid investments (how much money can be easily converted to cash), and level of risk. Then the computer, not-so-magically, takes all of this information and soullessly spits out a one-size-fits-all investment “plan”. Typically what one receives as their “plan” is a list of about 7, or so, ETFs (Exchange Traded Funds) creating a diversified, low-cost, and mindless portfolio. Voilà, you are done and the computer will rebalance your portfolio every quarter for the rest of time, or until you decide to change something – the operative word there being, you.


One reason I am not concerned about these machines taking over the investment advisory business is that they are machines. They are monotonous, soulless, utilitarian things that only run algorithms produced by men. These systems are designed to take in minimal information and process this information with no human interaction, no relationship, and no real understanding of human behavior, psychology, or desire. Their investment “plans” are no more personalized to their customers than the one-size-fits-all baseball cap I bought yesterday with the adjustable strap in the back to make it larger or smaller depending on the size of the head in which it rests. For me, I want more than an algorithm designed by some egg-head in California’s Silicon Valley planning for my financial retirement. Now, does this mean that I outright reject the notion of these robo-advisors? Absolutely not, and in fact I plan on rolling over a retirement account to one. I do this for only one reason, however. It is a low-cost tool that I can use as an automated portfolio manager so that I don’t have to worry about rebalancing my own account every quarter. Subsequently I do not agree with its assumptions regarding my portfolio allocation and I opt to set my own risk tolerance level. Likewise, I do not agree with its assessment of my retirement needs it based on only a few low-info questions that can roughly be answered identically by several million other Americans.


There has been a good deal of research done since the great recession of 2008-09 on the subject of risk tolerance. Some of this research shows, quite practically, that when times are good (think late 1990s or 2004-07 time frames) people often show an absence of concern for financial risk. This is one reason why we witnessed a tech bubble in the late-90s and a real estate bubble in the mid-2000s. But, once times turn sour, people’s indifference turns to worry and their tolerance towards risk goes away. So, had someone opened an account with a robo-advisor in 2007, they may indicate a tolerance towards investment risk that would put them into a highly aggressive stock portfolio with lots of potential for future loss of investment. Moreover, had that same person opened an account just one year later in 2008, after the market collapse, the risk tolerance profile probably would show a more conservative portfolio with heavier investments in government bonds and cash. One thing that a robot cannot do is hold a person’s hand as the stock market roller coaster travels downward and our mind tells us that it isn’t going to stop until we hit something solid. A robot cannot encourage a person to oppose their basal flight response from danger and recognize that their best investment opportunities come when the Wall Street roller coaster is traveling downward. As human-beings, we can logically overcome our primal fear of loss to make provoking and profitable decisions to better our financial futures, but robots fell no fear so they cannot empathize.


Lastly, I am not concerned with these zombie-advisors because they don’t offer much value to my clients. My clients come to me for reasons other than investment management. Yes, portfolio management is part of my job, and it is how I get paid (assets under management), but that is exactly how these robots get paid too. My clients come to me for much more than just investing; they come to me for my know-how on charitable estate planning, risk management, and holistic financial planning. Everybody’s situations are different, and like snowflakes, there are no two situations alike. Therefore, a personalized comprehensive financial plan, incorporating all aspects of a person’s financial life, is too complex and too intricate for a simple machine to accurately accomplish. Therefore, a machine cannot do what I do in any real sense of the meaning.


If you see a commercial for one of these so-called “advisors” on TV and think it is right for you, just remember the limitations of their abilities. This may be something that can be useful to some people, but robo-advisors will not, at least until we can accurately recreate the human brain with all its complex emotions and understanding of human behavior, replace the sympathetic relationships needed to truly create an effective connection between client and advisor.

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