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Can robo-advisors help me with financial planning?

Brian Hayslip


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This is a contentious issue in the financial planning world; financial advisors and fintech entrepreneurs have different opinions about the financial planning capabilities of robo-advisors. In order to honestly answer this question, it’s important to have a baseline understanding of what “financial planning” really means. Financial advisors take a holistic approach to their clients’ financial picture in order to develop a comprehensive financial plan. Traditional financial planning involves:
      • Identifying and defining financial goals, i.e. buying a home, starting a business, retiring at age 60, paying for college, and then setting benchmarks to measure progress.
      • Analyzing cash flow to see what’s available for debt, and long- and short-term saving and investing.
      • Preparing personal net worth statements and adjusting the financial plan as needed to achieve financial goals.
      • Formulating and prioritizing a comprehensive retirement strategy that includes accumulating adequate assets and planning for lifetime distributions in the most tax efficient manner.
      • Developing a comprehensive risk management plan that reduces exposure to loss, which includes recommending appropriate insurance coverage (disability, life, property, etc.).
      • Formulating a comprehensive tax reduction strategy that lowers tax liability to the extent allowed by law.
      • Developing an estate plan that preserves assets and minimizes settlement costs and taxes.
      • Identifying optimal investments and asset allocation based on financial objectives and risk profile.
      Here’s the core of the robo-advisor business model: Providing low-cost automated investment management services and creating balanced, diversified fund portfolios based on risk tolerance and time horizon. In other words, robo-advisors address a very small part of your overall financial planning needs. What they don’t do, however, is help you create realistic goals, optimize your cash flow, integrate your financial strategies, balance your overall risk, or visualize your financial picture as a whole. Those are things that require a human touch, at least given the current state of artificial intelligence, machine learning, and financial technology. Some robo-advisors do offer a larger menu of financial planning and advisor services. Betterment, for example, added a tool to account for other retirement assets, such as an employer 401(k) account, to help optimize its retirement planning services. Wealthfront adds outside accounts in its net worth projection tool. It also added Path, a tool that draws on data from the National Center of Education Statistics, to enhance its college planning capabilities. And several robo-advisors offer hybrid models, which add access to human financial advisors to the automated investment management services. Robo-advisors are a great alternative to more costly financial advisor services, especially for new investors and those with small portfolios and few assets. They provide broad exposure and portfolio diversification, along with cost-efficient investment management services. If you have a concrete goal in mind, such as accumulating a certain amount of money within a certain amount of time—buying a bigger house in five years, for example—a robo-advisor does a great job balancing risk and reward in a low-cost way for the money you’re investing toward that goal. A robo-advisor may even make sense for more mature investors with large portfolios who want to invest a chunk of their assets into a diversified portfolio of passively managed ETFs in a way that minimizes management fees. For example, if you have a financial plan that calls for investing a certain amount of money in a diversified 60/40 portfolio, a robo-advisor could manage that efficiently and inexpensively. But as a replacement for comprehensive financial planning, robo-advisors definitely fall short, at least given their current capabilities. When the next generation of super robo-advisors emerge, which promise to offer the full array of financial planning services, it may be time to revisit that conclusion.
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