Robo-Advisor or Robo-Adversary?
This was passed on to us by a fellow advisor and it is important that you know the costs of these "new" investing platforms.
"One of the big pushes on TV coming from the financial industry is the idea of "intelligent" or "Robo-Advisor" portfolios and the idea that investors can get super low cost investing with this new technology. The old adage "if it sounds too good to be true..." comes to mind. So what is the catch?
Investment firms are employing a wide range of strategies to make money and hide expenses. One of those strategies involves the holding of excessive levels of cash, which they lend out and make higher returns on the spreads. Instead of crediting those returns to the investor, they keep the money for themselves. Any way you slice it, that is a hidden cost and it's perfectly legal.
Another strategy is "pay to play". Big firms are requiring ETF providers to pay large sums of money to be part of their platform of investments. That creates a conflict of interest that results in funds only being included if they are willing to engage in this type of "payola". If the funds used were truly great, you might think that they wouldn't need to pay anyone to create demand for the fund, and we would agree.
Many ETF providers are also being required to share management fees with the firms creating these automated portfolios. That incentivizes the ETF provider to increase underlying fees to pass the expense on to the investor. Since investors rarely look for those invisible expenses, most will never notice.
Portfolios put together in a "robotic" fashion are nothing new. One type of automated portfoilio that has been with us since the 1990's is the target-date fund approach. (If you are retiring in the year 2030, you would simply buy a Target 2030 fund.) As we have pointed out on many occasions, these funds struggle with performance due to: allocation issues, fund choices, market timing, excessive tradng, market-tilting and some of the conflict of interest noted above.
The biggest difference with this newest approach is that the performance of these "new" portfolio designs won't be easily or widely reported so they are subject to scrutiny. Unfortunately, the people who unwittingly take the dive into this territory will likely never know the true costs or the real risks until it's too late."
The only thing we have to say is that there is a reason why you have a human financial coach. You need someone who understands your needs and will keep you on track towards achieving your financial goals. We have to remember that computers and robots are designed to follow commands. A computer or robot, will not be able to understand your needs, calm you down, and keep you on track during times of market volatility. A computer will not tell you that selling low breaks the first rule of investing. Or by doing so, you will incur a large tax bill and lock in those losses. If the market is down and you're thinking about cashing out, the last response you'll want to hear from your advisor is "Are you sure?" You'll want an actual person to give you prudent investment advice to prevent you from stock picking, market timing, track record investing, or any other action that would destroy your investing peace of mind.