Episode #17 - 🤖 Investors coming your way
Do you need a robot? Check this to find out.
Intro:
The robots are coming. For some that means a home strewn with mud tracked by a Roomba, for others it’s a scene out of Terminator. The robots I’m talking about are just getting started and we’ve got three main takeaways:
How you can use them now?
What might come in the future?
How should you act based on this information?
Finally, I’ve got some follow up on the topic of personal financial advisors - which was a hot topic last go around.
Background:
I haven’t counted, but I must have mentioned “rebalancing your portfolio” in 50% of Winnings episodes. Why, you may wonder? I think the principle of deciding the risk you want to take and combining that with consistency of buying and selling the stocks/bonds/REITs/etc to continue to match whatever financial goals you have set for yourself will most likely yield a steadily growing nest-egg over time. Even though the pie rebalances, it should also get bigger. When it shrinks, which at some points it might, the rebalancing will ensure you don’t endure too much pain on the entirety of the pie.
The first consumer facing robo-investor came onto the scene in the form of Betterment in 2008. For those who recall, their formal launch was in 2010 which was at the height of the great recession. It is important to remember, as our friends at Investopedia remind us, big banks and financial advisors had been using these “robots” since just after Y2K, but they became “consumer facing” - fancy language for “you don’t need to be a fancy financial institution to get access to the technology.”
The big draw of the robot-as-investor model is twofold in my mind: 1) The minimum amount of money you need to start in a robo-investment system is as low as ZERO dollars. Compare that to a traditional financial advisor who might have much higher baseline needs. 2) The fees from the robots are just much lower because they don’t require the same amount of human hours to get the work done of rebalancing a portfolio and talking to customers directly - more on this at the end of the episode.
Certainly there are drawbacks, which we’ll cover in the weeds, but if you were scared off by having to talk to a person about your finances, the robot surely will alleviate that concern.
Into the weeds:
For our purposes, I think starting where the Investopedia article ends actually sets us up for real-talk about these robo-advisors:
Furthermore, robo-advisors operate on the assumption that clients have defined goals and a clear understanding of their financial circumstances, to begin with. For many, that is not the case. Answering questions like, "Is your risk tolerance low, moderate, or high?" presupposes the user has a fundamental knowledge of investment concepts and the real-life implications of each option they choose.
So many of the robo-advisor advantages come from the cool and collected or simply stoic and, wait for it, robot-like approach that these machines use when they evaluate your financial capacity and investment options. Knowing what you want from your portfolio - sometimes it’s “retire by 2075” or “buy a house by 2040.” When the parameters are more defined, the robot takes what you give it and plays the market in a way that it will most likely get to that goal. Rest assured, they need to be registered with the SEC so they can’t do any funny business, unless what they’re doing is illegal, and in that way they are just like humans.
You can easily imagine the downsides of this relationship: Some windfall of inheritance or surprise job loss may send signals that would require some re-evaluation of the approach you’re playing. Your own life-cycle events can require some adjustments.
As any good episode would tell you, there are also more weeds. If you’d like those, go for this article.
Takeaway:
Ok, so robots are cool, helpful, and can manage your money at a much lower clip than a person can. Think the difference between .25% and 1-2% - that adds up quickly. However, as with most things in life, you get what you pay for. If you want someone to hold you to task a live broker will follow-up with your and get you to commit to goals and hopefully hit them. The robot will take your $$ and follow your direction, you can kick your feet up and follow its lead. However, whatever info you volunteer to the robot will be what it uses to build the brightest future for you.
Interact:
You’ve heard about robo-advisors and real advisors. Which would you prefer? Tell me with this survey.
I’ve gone with Wealthfront (full-disclosure this is my personal link and I get more money MANAGED for free if you sign up with it) as my robo-advisor though others do like Betterment. If you respond to this email, I may do a compare/contrast for those who want a more in-depth analysis of those two platforms.
Either way, I encourage you to open an account in one of these platforms and share your risk profile with them. Once you get that out of the way, a lifetime of investments is in your future.
Gratitude:
Over the past episode or two a fair number of community members have offered feedback and encouragement and I want to give them a shout out here:
First off thanks Leora G for her encouragement and sharing her interest in investigating a financial advisor for herself in the future - I’ll say simply, go for it! Have a conversation and learn something.
Shoshi S. pointed out that in the last episode I mentioned modest reception of the Winnings survey, but then I drew some conclusions. This is an important methodological point - I don’t think the survey was entirely representative of the community and I hope in the future more readers will participate.
Robert H. actually found an error in Episode #14 that I must acknowledge now because I didn’t do so sooner! I miswrote - treasury bonds are subject to FEDERAL taxes, but they are not subject to STATE or LOCAL income taxes.
Finally, I don’t want to leave those hanging for more ideas on the financial advisor topic, I’m delivering them here. The important thing to keep in mind with real live advisors is the following: 1) Based on a new regulation from the SEC, certified advisors need to take into account the client’s REGULATION BEST INTERESTS and not only what was called “suitability requirements.” This gets into the weeds quickly, see Homer above, but now you are more protected in the US than in the past when using a certified advisor. 2) Not all financial planners offer “comprehensive financial planning.” In broad terms, when they do offer those services, they’d include wealth protection, wealth optimization and wealth accumulation. In more detail, those services come in the form of life insurance, financing loans, and identifying brokerage accounts for you to invest in, and more.
In reference to the topic of this episode directly, robo-advisors have yet to foray into that area of a comprehensive financial experience - if you’re looking for that, people like my friend Israel are well worth talking to.