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Should you let a robo-adviser invest for you?

Feb 6, 2015
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As the economy picks up strength, more people are heading back to work and some are even seeing their wages tick upward. That means the lucky among us might find ourselves with extra cash and wondering what to do with it – after building up savings for emergency expenses and contributing to 401ks, of course.

An increasingly popular option for many want-to-be investors, especially millennials, are robo-advisers – online services that help people through a variety of financial decisions, such as how to invest a lump sum of money or provide feedback on the current mix of assets in their portfolios. Interfaces range from completely online and automated to those that may offer occasional video chats with human advisers. Many begin with a questionnaire for customers.

The questionnaires “remind me of a little bit of those Facebook, you know, ‘What ’90s song is your rock anthem?’ or ‘Which movie star is your soulmate?’” says Barbara Roper, director of investor protection at the Consumer Federation of America. “Ten questions, and they know supposedly everything about you.”

For example, an automated investment service called Wealthfront will create personalized portfolio recommendations for customers based on answers to these questions:

  • What are you looking for in a financial adviser?
  • What is your current age?
  • What is your annual after-tax income?
  • What is the total value of your cash and liquid investments?
  • What would you do if your portfolio lost 10 percent of its value in a month?

Roper says these questions are meant to help the site determine an investors’ risk threshold – a difficult, complicated task, even for human advisers and especially tricky for robo-advisers. In general, robo-advisers can be a good option for investors, especially if they take a “set it and forget it” approach, she says.

“You set up some parameters, you automate the process, you keep expenses as low as possible, you diversify through ETFs,” says Roper. “Those are good principles.”

People considering robo-advisers may be attracted by their relatively low fees and the fact that – unlike some human advisers  they tend to have low minimum-investment requirements.

“Broadly speaking, these services are catering to less-affluent individuals,” says Grant Easterbrook, a former analyst specializing in financial technology.Most human financial-advisers have account minimums. They don’t want to work with someone below a certain threshold. They don’t think it’s worth their time.”

By Easterbook’s calculations, the top 11 startups in this space, most of which have only been live for a year or two, have $19 billion dollars invested with them – and they’re growing fast. That’s drawn some bigger banks into the space as well.

But how does working with a robo-adviser compare to consulting a good old-fashioned human being, and how does the financial advice differ?

Sheryl Garrett, an independent certified financial planner who runs the Garrett Planning Network, says her first question for new clients is often: What’s going on in your life?

She inquires about a client’s income, debt, career plans, retirement accounts, what the money that may be invested will eventually be used for, if there are expenses on the horizon or a few years down the road, or family obligations they might have to take on. These types of questions can reveal deeper issues in our financial lives that the client may not even be aware of, she says.

Garrett’s not opposed to people using robo-advisers, although she cautions that automated advice can miss the bigger picture  that the extra money we think we have might not be truly extra. Her advice: planning first, and maybe, if it still makes sense, Internet second.

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