“The financial services business in the midst of great disruption and the traditional financial advisors will have to work harder to provide value”; words from a good friend of mine. He was referring specifically to the recent rise of the so called “Robo-advisors”. It is true that financial services industry is going through some transformation, not unlike other industries. However, it is unlikely in my opinion, to go the route of the traditional travel agent model, where in the last fifteen years or so the public tends to bypass the traditional travel agent to book with Expedia and the like.

First, let us discuss what the Robo-advisor does. They use algorithms to model portfolios based on an investor’s response to a set of simplistic risk tolerance tests and objectives. It is important to appreciate that a risk profile assessment indicates how much risk you CAN take, not how much you SHOULD take. Essentially, the robo is a set of automated asset allocation models. The robo-advisor’s appeal is its low cost technological approach to diversified asset allocation investing.

However, there are many aspects of a good financial advisor that cannot be automated. For instance a good advisor would generally take a wide-angle holistic view to a client’s portfolio. Many investors really don’t have an appreciation for investment risk and what the implications are to the set goals and objectives that they have. All assets, current savings patterns, cash flow, and other special need financial considerations would be integrated into a discussion to help clients target the appropriate level of risk. And as time passes, appropriate adjustments would be required based on an evolving financial situation of the client. Robo-advisors cannot help here as their scope is very narrowly defined to a bucket of money invested to a particular volatility profile selected by the investor. Plus it should be mentioned that robo-advisors cannot provide the traditional coaching and hand-holding required during periods of market volatility. A great deal of investing is emotional, especially in relation to market gyrations.

Ultimately, robo-advisors do have some value. If a client is just starting out, and wants some disciplined access to modern portfolio efficient frontier type asset allocation strategies, or if a client is willing to be tied to a simple questionnaire of asset balances, time frames and basic goals; then the robo-advisor might be a fit. However, a relationship cannot be built with a robo-advisor that accounts for the unique situations in most clients’ financial lives. Unfortunately, this might actually be a cause of inefficiency and detriment to a client long term.

Ashvin Chheda, ChFC, CLU
Opes One Advisors
President

To learn more efficient asset allocation strategies, please contact Ashvin Chheda at Ashvin_Chheda@Opesone.com or 214-334-5656.

This material contains the current opinions of the Ashvin Chheda but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.