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.
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