Why Robo-Advisors Will Have Issues Maintaining the Trust of Their User Base
Robo-only advisors have recently been very successful at raising new capital and focusing their resources on winning over millennials. Therefore, we find it timely to discuss the client’s historical need of a financial adviser. While the understanding of clients’ risk tolerances that robo-only advisors provide is undoubtedly an important part of investing, it remains only part of the picture. Of equal importance is taking into account the risk tolerance of investment markets and how this may impact the client’s financial profile. Regardless of how much risk a person can afford to take, no one wants to enter an unstable market environment only to discover that he or she did not adequately account for his or her entire financial situation.
The Singularity of the Individual
Robo-only advisors can judge a client’s risk tolerance very accurately if the client understands his or her goals, priorities, and situation very well. But how often is this truly the case? Clients often require more complex guidance as they crystallize their aims. A robo-only advisor is incapable of providing this type of guidance. It is not a stretch to believe that the narrow range of environments in which robo-only advisors excel will be a mitigating factor of their success.
It is understood that robo-only advisers are built by very intelligent people, but it appears that these engineers have forgotten the informal definition of an engineer: Someone who performs precision guesswork based on unreliable data provided by those of questionable knowledge. In their present structure, robo-only advisors are not equipped to blend the client’s risk with market risk, both of which are dynamic. Because of this, there is ample reason to think they will have issues maintaining the trust of their user base.
Drawing on my past experience investing in the technology sector, I realized that the objective of technology is to spare people from performing mundane, repetitive tasks. Most innovation drives an increase in productivity by mechanizing repetitive functions that people do by hand. Think about TV dinners: Hot meals are time-consuming and costly to make, but because of the development of microwavable dinners, you simply have to unpackage a meal and pop it in the microwave to have a hot dinner ready. Viola!
However, this type of standardization only works when cooking and eating are viewed as tasks or chores. Tastes change, and most people don't want to eat the same thing over and over again (Unless it’s pizza — everyone loves pizza). People seem to crave “homecooked” meals, despite the ready availability of microwavable meals. When it comes to food, most of us crave quality and variation. TV dinners fail to account for some people’s desire for customization and craftsmanship.
Technology has proven highly effective at mechanizing the repetitive functions that hinder our day-to-day lives. It fails, however, at dealing with the exceptions to the rule. Human input, thought, and effort are required to handle tasks that are fluid, unpredictable, and complicated. Unlike people, robo-only advisors cannot easily adapt to new situations, hindering them in any environment that is not static and controlled.
Investing is built on singularities. Every individual has his or her own risk tolerance, return objectives, tax consequences, and family situation that need to be matched to the risks within the markets. The robo-only advisors’ strategy of forcing every investor into predefined buckets no matter the market environment may function when working with millennials, who are in the early years of saving and have adequate time to recover, but it trivializes the priorities and the circumstances that make us all unique.
Retirement Planning Has Its Limits: How to Prepare
Retirement planning is one of the issues that commonly leads clients to consult financial advisers. One of its essential aspects is creating a plan to save and invest in order to provide a comfortable retirement income. Ideally, this starts many years ahead of retirement, even as early as your first paycheck.
As retirement comes closer, planning for it expands to take in a host of other considerations, such as deciding when to retire, where to live, and what kind of lifestyle you hope to have. When retirement becomes a reality, the focus shifts to carrying out the plan.
All of this planning is crucial. Yet, for both financial advisers and clients, it's good to keep in mind that planning has its limits. In the post-retirement years, it may be helpful to think in terms of preparing for old age rather than planning for it.
The older we get, the more important this distinction between planning and preparing becomes. Too many life-changing things can happen without regard to our best-laid plans. Often they occur unexpectedly, resulting in emergency situations where urgent decisions have to be made. A stroke or a fall, a diagnosis of terminal illness, a broken hip that leaves someone unable to go back to independent living—and suddenly, right now, the family needs to find an assisted living facility, arrange for live-in help, or sell a home.
What are some of the ways to prepare for these contingencies?
- Explore housing options well ahead of time. Find out what assisted living, home care, and nursing home services and facilities are available where you live and whether they have waiting lists. Have family conversations about possibilities like relocating or sharing households.
- Research the financial side of these options. Investigate the cost of hiring help at home, assisted living facilities, and nursing care centers. Find out what is and is not covered by Medicare and long-term care insurance. For example, people are sometimes surprised to learn that Medicare does not pay for nursing home care other than short-term medical stays.
- Designate someone to take over decision-making, and do the paperwork. Execute documents like a living will, medical power of attorney, and contingent power of attorney. Update them as necessary, and give copies to your doctors, your financial planner, and appropriate family members.
- Start relatively early to downsize. Well before you're ready to let go of possessions or move into smaller housing, start considering what to do with your "stuff." Focus on the decisions rather than the distribution. There's no need to get rid of possessions prematurely, but decide what you want to do with them—and put in writing. Do this while it's still your choice, rather than something your family members do while you're in the hospital or nursing home
- Do your best to practice flexibility and acceptance. No matter how strongly you want to live in your own home until the end of your life, for example, it may not be possible. The physical limitations of aging can limit our choices, and even the best options available may not be what we would like them to be. It is a profound gift to yourself and your family members to accept these realities with as much grace as you can muster.
Finally, please don't underestimate the importance of planning financially for retirement. Because the bottom line is that you can't plan for all the things that might happen as you age, but you can prepare to deal with them. One of the most useful tools to cope with those contingencies is having enough money.
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