Trusting a Robo-Advisor with Your Financial Planning Could be a Big Mistake

Taylor Leary explains why robo-advisors are not a replacement for the human element when it comes to financial planning.

Table of Contents

Technology and Investing

In recent years investors have seen a rise in automated algorithmic investment management platforms called robo-advisors. Robo-advisors promise to provide digital financial advice with little to no human interaction. At first blush, this seems like the easy and carefree way of investing bypasses talking to a professional financial planner, however, most investors should approach with caution.

Using an algorithm to advise you on your investment decisions may seem like a new cool way to invest, but, like most things, the devils in the details. Personally, I was interested and fascinated by these new platforms, so much so I felt compelled to research them. After more due diligence, I walked away unimpressed. There are many reasons that using a robo-advisor solely for your financial advice may have negative consequences. The technology doesn’t provide a unique plan to understand your nuanced financial situation, and the investment strategies are unproven and may provide a false sense of security. 

Your financial situation is unique to you. You have unique goals, needs, fears, and challenges that make your financial position different from anyone else’s. I know twins who both work together in a family business and live in the same town and yet their financial life is dramatically different. Unfortunately, robot-driven financial advice does not do a great job of accounting for unique differences that exist in your financial life.

Automated Technology Platforms Can’t Replace Humans

I recently received a notice from our mortgage company requesting updated documents. It read like a ransom note: “You better submit this document or else!” The problem was I had already uploaded the requested document weeks before. Panicked, I immediately called the 800-number provided. After over 20 minutes and an ungodly number of prompts later I finally connected to someone from some overseas call center. Unfortunately, after about fifteen minutes of explaining and re-explaining, I was told to upload the document (which I had already done). 

This is a perfect illustration of when technology lets you down and you need to speak with a human that understands and can help you with your problem. What I later found out is that the document I uploaded weeks before wasn’t being read properly by — you guessed it — the computer digitally scanning the documents. This was a misread document and the results weren’t life-altering. But what if you received the same round-and-round when another 2001 or 2008 market event occurs? Who — or what — will you turn to?

Technology can be a great asset in our lives, there’s no denying that. But technology has an interesting way of making some tasks more convenient and complicating others. What worries me is that the introduction of robo-advisors may give investors a false sense of security and ease. When car makers introduced ABS brakes, the industry believed it would save lives and reduce accidents. However, the opposite occurred. This is because people believed the technology would make them safer and therefore, they took on more risk while driving. If an investor believes a mathematic algorithm will watch their portfolio, and always make the right the decision, they may feel they can take on more risk.

In the past several years there has been an increase in investors moving to robo-advising platforms. This may represent a perfect storm. The rapid gain in popularity has occurred in lockstep to the increases in the market since 2009. This has coupled with a pervasive belief that indexing is the best way to invest. When we eventually see a market downturn, I am skeptical that robo investments will act any different from a traditional investment strategy. A prolonged market downturn requires more patience and diligence than a robo-advisor can provide. Your financial health and well-being is drastically different from your neighbor, and therefore you must make decisions based upon our own circumstances. Financial algorithms used by robo-advisors may cover some basics, but they cannot navigate the nuanced details of your financial situation. 

You Can’t Always Trust Google Map’s Directions, So Why Would You Trust A Robo-Advisor to Guide You Through a Major Financial Downturn?

When I think of new technologies in various stages of maturation, I’m reminded of web-based map applications like MapQuest or Google Maps. New technologies are constantly changing and require recalibration. Recently I was traveling in the mountains and unfamiliar with the streets. I had my wife plug in the address to our destination. As we drove closer to the location, it occurred to us that the destination on the map was not actually the house we were looking for but a nearby field. Instead of relying solely on the digitally mapped directions, we had to sort through the clues and landmarks to deduce the location of the address. Had we blindly followed these directions we would have spent a miserable night in a field, with hot cocoa, a warm home, and cold beer only a few thousand feet away.

Just like the map example, a robo-advisor may not accurately help you get you to your destination. Making personal financial decisions is a uniquely human experience, and you sometimes need to override the computer to achieve your goals. Robo-advice is in its infancy and still needs time to mature. I believe it will find its place in the investment management and financial planning industry, but for now I look at it with great skepticism. 

In 2009, Warren Buffett opined “beware of geeks bearing formulas.” In no uncertain terms, the Sage of Omaha declared that we should view using algorithms as an investment guide with a VERY healthy dose of skepticism. Robo-advisors promises an inexpensive and carefree approach to investing, but we should remember that some technologies can’t replace the human touch. 

Technology is a Tool, not the Total Solution

There is a time and a place to leverage technology and pairing it with traditional methods can create a more optimal outcome. If you’re like me and enjoy using technology to your advantage, then you might consider using a human advisor that has innovative tools and resources to provide value to your financial situation. Using the knowledge, skill, and experience of a qualified, trusted advisor — like a Certified Financial Planner® — should be used in concert with advanced technology. Having a real relationship with an advisor provides a layer of understanding and empathy that you cannot get from a robot. 

As a Certified Financial Planner, Taylor works with active and engaged professionals to help them achieve ambitious goals on their journey to financial freedom. Creating a comprehensive financial road map requires understanding the source of his clients’ wealth, their goals and objectives, and how their past financial experiences shaped who they are today. His philosophy on wealth management incorporates financial planning, investment management, behavioral coaching, and top-tier service and communication.

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