Why a robot financial adviser is a smart money choice
Multi-tasking moms depend on technology to organize and manage calendars, grocery lists and even sleep cycles, because apps exist to make life easier. Why should managing money or investing it be any different? Millennials especially are the least-trusting generation of Wall Street. Typical 20- and 30-year-olds turn to technology for investment advice first before asking human financial advisors. A Harvard University study shows only 26 percent of millennials own stocks and their investing profile looks more like that of a retiree.
Problem is, playing it too safe has its own risks. The stock market has rocketed more than 200 percent over the past six years. That means the value of $5,000 in cash you placed into the stock market back in March 2009 would be worth at least $18,000 right now. That's enough to jump start a college tuition account.
Every busy mom I know has three to four social media accounts and everyone generously shares valuable information, even about money: how to save it, how to spend it and even invest it. Social media tools such as Facebook and Tip'd Off are allowing us to share investment tips among even more friends and strangers. But are your Facebook friends really your best source of serious investing advice? Do you want to entrust your retirement planning to them?
Meet the robo-advisor
Maybe you've heard the term robo-advisors. It's actually not personalized advice so there are no advisors behind the curtain. Apps like RobinHood, SigFig and FutureAdvisor are making it easier for you to gain access to computer-generated stock portfolios and invest practically for free. When you go to one of these sites, you'll be asked five to 10 questions to establish your profile, mostly questions about how much risk you like to take with your money. The robots do the work to come up with a suggested way to diversify and invest your savings, mostly in stocks. If you feel comfortable letting the robots invest on an ongoing basis, sit back and let the software rebalance and make adjustments automatically.
Comparing robo-advisory options, keep in mind:
Investment choices. Some robo-advisors limit you to a small selection of ETFs while others have partnered with multiple mutual fund groups to provide a wider universe of choices.
Full investment services. Services offered can range from asset allocation to rebalancing, dividend reinvesting and tax loss harvesting, replacing losing holdings with similar securities and offsetting the loss against capital gains for tax purposes. Be sure to ask for a breakdown of the fees involved.
Fees. Robo-advisors can be found with low to no fees, and no minimum deposit required to open an account. Fees may increase on a sliding scale based on the account balance and services used.
The biggest selling point is you can avoid dealing with pushy stock brokers. The bad news is you no longer can access the highly personalized guidance you could get from a really good human financial advisor. Robo-advisors have limitations, especially for a new investor.
Will I ever need a human financial advisor?
When all you need is a little help sorting out how you want to allocate your investment money... in other words, split it up between different asset classes such as stocks, bonds, real estate or cash, the robo solution is there to suggest some good mathematically tested strategies. But these robos have not been around long enough to really have dependable track records. And let me ask you this, what happens when your brilliant child actually gets accepted into Wharton and now you have to raid your retirement plan to meet the stratospheric tuition bill? What if you find yourself divorced and your settlement is smaller or much larger than expected, or you lose a parent and wind up inheriting a small fortune? At these points in life, the investment, tax and legal questions also become much more complex and investing becomes much more personal and emotional.
That's when robots can't help. Those are times when a relationship with a human financial advisor becomes a priority. What if you're just starting out as a brand new investor? Digital portfolios save time and money once your financial planning is already on track, but they really can't get you started. A real-life and qualified investment advisor will educate you and guide you through the process.
Money is and always has been emotional. Real people want human interaction along with a personalized, customized investment plan. Not to mention a fiduciary relationship to always act in your best interest.
Best of both worlds
Social media and robo-advisors should not replace your human advisor. They are very good, though, at rooting out bad financial advisors. Technology is finally forcing transparency and exposing investment advisor fees and true performance. My advice is take advantage of this and combine the best tech with human expertise. Together with other millennial parents, you are spending $1 trillion each year on your children. You want to make sure you money is invested wisely and growing as your family's needs grow.