Are robo-advisors providing good value?

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It's a well known point that when you read an article with a rhetorical question at the top that the answer will almost always be "no". I'm writing this as obujectively as possible though and will leave the answer up you at the end; that's how things are with your money so we should use the same standard here!

 

As an advisor I am obviously biased in these matters.  That said I have thought about this from my personal vantage point and not simply as an advisor. Would I take my accounts to a robo-advisor if I were in a different industry. Here, while I am asking a rhetorical question, my answer is definitely no. Here are a few of the reasons:

 

1) I'm not sure what you are paying for.  While you are buying index funds and taking a purely passive stance in terms of your investments, I can't figure out what the fee they charge is for.  You don't get custom investment advice at all, or any active decision-making. You don't receive any ideas for how things are held or strategies unique to your situation. There is no follow-up as the markets change or your needs or goals change. As I've written about in other posts you aren't really even following a strict passive mandate in the truest sense.

 

2) There is no personal touch. I think that this is an under-rated and perhaps somewhat under-appreicated side of dealing with an advisor in person. I have a good friend of mine who lives in a small town. We were talking about banking and he told me that he still goes into the branch to do his transactions.  I thought that was a little odd, because so many of us use online banking or machines for everything these days, but his reasoning was actually simple.  "When I walk in they know me, and say hello. I just like that."  Makes sense to me. When you have an advisor you have that same relationship. You meet with them and develop a friendship as well as a business relationship, and that actually helps when its time to review things and plan for your future.  

 

3) I remain unconvinced that the investment strategy is the best it can be. Here my thoughts are a little more biased, but the strategy put forward by these firms isn't impressive in my opinion. Its strictly indexing. While I like indexes (and you can see that on my investment strategy page), there is more to investing than just buying an index and calling it a day.  There are mispriced securites and economic events that you can look towards for strategies.  These don't only provide increased returns or something to talk about around the water-cooler, but hopefully limit your risk in some situations as well. The other thing is that for some people a straight indexing approach is more risky than they need to take; we know with a number of financial strategies that people can receive similar returns to the indexes but with less risk; thats a valid strategy for a certain segment of the population. 

 

4) The robo-advisor requires that you already know what to do. If I were doing this list in order of importance this probably would be #1.  The thing is that the robo-advisor doesn't provide clear advice; they don't look at a scenario and review things to help you decide what to do or how to structure things. So you come to them and say "I need to do this" and they provide a vehicle for you to do that. At least from the vehicles I've seen there is nothing where you sit down and plug in the accounts you have all over the place and have collected through the years, the half a dozen life insurance policies and explain your current situation and what you're trying to do. No one takes all that information and comes back to with a suitable strategy and advice based on your situation for you.  At times its like walking into an accountants office with a shoe-box full of receipts and having them (or a bookkeeper) wade through it and figure it all out for you. That's not something a robo-advisor can do. 

 

As I said in the first paragraph, I leave to you to decide on whether there is good value provided by these outfits. I lean towards to "no" side of the equation, and hopefully have explained why above aside from my occupational bias.