For years, service industries have been moving toward increased automation and technology. Doctors’ charts are replaced with online records. Touchscreens and online ordering replace cashiers. Even police officers are replaced by red light cameras.
Some automation is successful. Other automation (like robo-calls) is arguably unsuccessful.
A few years ago, there was a great rise of so-called robo-advisers, computer programming that enabled setting a simple asset allocation on the security level and then automatic rebalancing to those targets for each security.
In 2015, we reviewed Schwab Intelligent Portfolios robo-advisor service, since Schwab is the brokerage company we use to custody our client’s assets. We found that not only was its asset allocation design very flawed (read “Schwab Intelligent Portfolios: Built on a Faulty Premise” for more) but also their are nine problems with their rebalancing algorithm that a human trader at Marotta would have done correctly (see “Schwab Intelligent Portfolios: Incomplete Rebalancing Algorithm” for more).
Now don’t get me wrong. Robo-advisors could be wonderful. As a programmer and financial professional, I know how to code a service that can set up customized asset allocations, contribution and withdrawal schedules, and a tailored rebalancing algorithm to meet specific financial goals. I currently create analysis tools for Marotta Wealth Management which do these things.
However, a program is only as good as its programmer. Robo-investing programs produced by commission-based brokerage firms will make all the same mistakes the firms’ human agents do. They do not act in your best interest simply because they are executing a program.
Furthermore, there are always more factors that need consideration, and many of these that cannot easily be modeled by a computer. We wrote about several of them in “Schwab Intelligent Portfolios: Services Not Provided.”
One such service a computer does not provide is advising. As we quote in “Language Matters: Robo-Advisor vs. Robo-Investing,” David M. Zolt had written that “profound misrepresentation is just one of the many ways the financial services field misleads customers with language.” He goes on to explain:
So when the advent of automated portfolio management came around, the label “robo-adviser” was coined. The fact that no “advising” is going on here didn’t faze a field that’s entirely too comfortable with false labels. Robo-investing is the correct term. Have we become so numb to the misuse of labels in financial planning that when this new service is dubbed with the highly misleading label of robo-adviser we don’t even notice it?
An advisor should be your ally in finances for a lifetime. He or she knows you, your goals, your values, your family, and your finances. Despite the ups or downs life brings you, your advisor is there to face them with you. In the ideal, you advisor is an empathetic, accurate, clear, responsive financial professional. An electronic tool cannot replace that service, and that is why a recent survey showed that most Americans want financial advice from humans, not computers.
The problem is it is hard to find that in an industry where there is a fight over who is a fiduciary and the dark side of financial planning have the lobbyists who water down the term legally so they fit in it.
Photo used here under Unsplash Creative Commons Zero.