Facebook and texting. Those two phenomenon prove that people are choosing electronic connections over personal connections more and more. So does it make sense to turn your money over to a computerized financial planner while you’re at it? There are plenty of companies out there who want to convince you that it’s a smart move. But I don’t agree. In fact, I think it’s an evil plot.
Before I tell you how dangerous these outfits are, I need to provide a disclaimer. I am a financial professional. I make my living providing financial advice to clients. As a result you could make the argument that these companies are my competition.
I don’t really buy that but that doesn’t change a thing. I am biased. I don’t think you can compare a computer program to the advice a seasoned professional can provide. Like I said I’m partial so please read the following with that filter in mind. Daylight’s burning. Let’s get crackin’.
What Is Online Automated Investment Management?
This is simply allowing a computer to make your investment decisions for you rather than a human being like yourself or an advisor. The programs create an investment plan for you and implement that plan once you open your account with the companies who provide these services.
You start off by filing out an online questionnaire and the computer does the rest. It figures out what kind of investment mix you should use given your objectives and risk tolerance. Then it selects the funds you need to use and actually allocates your money to those funds once you open an account. Then, it automatically rebalances your investments on a timely basis.
The Big Benefits Of Automated Money Management
If you use a service like this, you’ll save a lot of money. There are no two ways about it. They charge a small fee and use really inexpensive funds to implement your plan. You’ll also save time. All you have to do is deposit money into your account and sit back to allow the magic to happen.
The Evil Behind Automated Money Management Companies
It all sounds good but in my experience, there are cons for each pro and the costs are far greater than the benefits if you ask me.
1. Precludes Investors From Getting Holistic Solutions
Some people who need an advisor connect with one of these services and think they’ve got their finances under control. But investments are only one part of a person’s financial picture. So the problem is that they hire a cheap service like this but fail to address the other really important parts of their financial life. Even though clients usually approach advisors because they want help with money management, what they really need is financial planning. A good advisor will tell you that. A computer won’t.
What about spending, insurance, emergency money, saving, estate planning etc.? Those topics are equally as important as money management if not more so. Why? Because even if you do a great job growing your money you could lose it all if your spending is out of whack, if you don’t have the right life insurance, or if don’t have your estate plan set up.
If you use an automated investment management company looking for investment management nobody there is going to tell you that you also need financial planning – because there is nobody there. It’s all automated…remember? This jeopardizes your financial future and therefore could make all your investment management irrelevant.
2. There Are Better Investment Alternatives
What these companies do is allocate your assets into several funds and rebalance the money periodically. But there are plenty of funds that already do that for you. Why add a service that you may not need? Fiddlesticks.
On the other hand, if you want to be more hands-on management for your investments, these services aren’t going to work for you. You’ll need to be very involved and that defeats the purpose. Sorry. I just don’t see who this really makes sense for.
3. You Need To Learn Too
The beauty of either investing on your own or working with an advisor is that it gives you an opportunity to learn. If you do it yourself, you will be forced to investigate different alternatives before you invest. If you work with an advisor, he or she should be explaining what is behind their suggestions and also be available to answer any question you have. Either way, you will be more in control of your finances with either of these alternatives vs putting your investments on autopilot and hoping for the best.
4. You Don’t Know What You Don’t Know
This point is connected to the first issue I brought up. You may think that your problem is money management but you might be making all kinds of mistakes and you could be overlooking other opportunities.
- Have you selected the right beneficiaries for your accounts?
- Is your trust updated?
- Are you investing in the right accounts?
- Do you have the right life insurance and the right amount?
- Is your spending plan in good order?
- Are you sticking to your plan?
- Are there any adjustments that need to be made?
- Etc…..
These are just a handful of the issues a good financial advisor will discuss with you. And since finance is a long-term proposition, a good financial planner will also hold you accountable to actually staying on the path over the years. That’s something a computer can’t possibly do.
Having a good investment plan is important. But you don’t need a computer service for that. Either run a financial plan and figure out how to invest your money yourself or hire the right advisor to do this for you. Life isn’t predictable so you can’t put your money on autopilot. You need to be make adjustments as changes in your life occur. The automated investment services don’t fill that need.
Where do you stand on automated investment services?
Paul says
I understand in the U.S. these firms are often times managed by Software Developers and Programmers with little to no investment knowledge, and more so than not by those who never experienced a down market. On that note, I agree with you. But here in Canada, where these firms are still very much in their infancy, they are backed by folks with CFA’s, CFP’s and MBA’s. Also, to their credit, they would be the first to advise those with a higher degree of complexity to their finances to search out more comprehensive planning.
Admittedly, the process is still very much the same, with computer algorithms deciding the most suitable asset mix. But until these firms have had an opportunity to live through some down and flat market cycles, and until we get a handle on how portfolios that are constructed by algorithms as opposed to advisor risk profile questionnaires differ, I find it an unfair criticism.
There are many more issues that we Canadians are currently dealing with that make the arrival of these companies a breath of fresh air. For the time being, I’ll leave my two cents worth of an opinion with what has already been written.
P.S. For what it’s worth, I’m a fan of your writing and your blog.
Neal Frankle, CFP ® says
Paul, thanks for the thoughtful comment and kind words! You are my kind of Pilgrim!