Robo Advisors Make Poor Psychologists
A robo advisor is a software platform that helps you manage your money in the same fashion as a real-life wealth manager. Since those living wealth managers require minimum balances of $250,000 or more, a robo advisor is probably a good idea to consider.
The pros are low costs, the utilization of sophisticated investment models that you would not otherwise be able to access, and minimums as low as $1,000 out of the gate. The cons are limited personalization and zero face-to-face meetings.
Another downside, which is rarely discussed, but massively important, is that robo advisors make poor psychologists, which can be a key component of accumulating wealth. When left to their own devices, individual investors tend to do all the wrong things: buy at market tops, sell at market lows, chase speculative flyers, take investment advice from their uncle, among other sins. It often takes the gentle prodding of a knowledgeable professional to stay the course on an investment plan.
In some ways, you don’t hire an advisor to beat the market, but rather to keep you from making the kind of mistakes that can permanently impair your ability to reach your financial goals. For instance, if you had all your investments in technology during the first Internet bubble, nearly 20 years on, you may still not be fully recovered.
So, if you have the minimum balance to afford a real wealth advisor, it’s generally not a good idea to hire a robot advisor to save on fees. If the choice is between managing money yourself or using a robo-advisor, the latter tends to be a better bet. The largest independent robo advisor is Betterment. Large warehouses such as Charles Schwab, Fidelity, and Vanguard (among others) also offer robo advisement.
David R. Evanson is a financial journalist in Philadelphia.