ST. LOUIS, MO (KTVI) - There are a number of online tools and calculators designed to give investors advice using mathematical formulas and algorithms. They're often referred to as, "Robo-Advisors." These tools can offer portfolio management for a low cost, but their scope and capabilities can also be limited. Matt Allgeyer, Financial Planner at Wamhoff Financial Planning & Accounting Services, explains the pros and cons of using a robo advisor.
About robo advisors:
• Robo advisors have become popular in this fast, technical world, and can be especially appealing to younger generations who are used to doing everything online or from their phones.
• There are a variety of robo advisor services available, including sites like Assetbuilder, Learnvest, and Motley Fool.
• In general, a robo advisor walks the investor through a series of setup criteria, then uses algorithms to provide portfolio management advice. This is all done online, and a human financial advisor is not part of the process.
When a robo advisor might be a wise choice:
• Because a robo advisor has low account minimums and are low cost, younger investors and those with a small balance of investable dollars are attracted to these types of services
• Many investors, especially younger investors, tend to have the majority of their assets in a 401(k) and less outside investments. In this case, a robo advisor could make sense.
• Some investors also feel they don`t need to pay for advice, so they rely on online, automated tools.
• There are also many investors who have a set-it-and-forget-it mentality when it comes to investments. Therefore, they`re not making moves or changes to their portfolio regularly.
The challenges and pitfalls of working with a robo advisor:
• Investors are human and have emotions which a robo advisor cannot respond to. When an investor is tempted to make a move based on emotion, there is no human present to explain the pros and cons and remind the investor of his/her overall financial plan.
• Those who have more investable assets outside of a 401(k) may not get the level of advice they need from a robo advisor. These types of portfolios are more complicated and benefit from ongoing management, rebalancing, and involvement from a financial planner - and in many cases, an estate planning attorney, accountant, and other professionals - to help the client make educated decisions.
• A robo advisor is limited in the scope of what it can take into account in terms of the client`s overall portfolio and wealth management strategy. I won`t consider things such as business succession planning, long term care needs, wills and trusts - all things that are very important a wealth management strategy.