When Are Robo-Advisors the Right Choice?

It’s undeniable that robots are part of our future; they already play huge roles in numerous facets of our everyday lives right now. But should you rely on robo-advisors to control your finances?

Many modern investors struggle with this hot topic. In a new piece for CNBC, Eric Jansen, the founder, president and chief investment officer of AspenCross Wealth Mangement, breaks down the pros and cons of employing a robo-advisor.

Can You Really Automate Your Investments?

It sounds like something out of sci-fi, but yes, it’s now a reality thanks to recent AI and FinTech developments: you can now hand your cash to robots so they can apply their cold, calculated machine efficiency to make it grow into more money. Go to any FinTech hub like New York City or San Francisco and you’ll find numerous companies specializing in this service.

After signing up with a service and answering a few survey questions, the robot processes this feedback with algorithms that help it determine the best asset allocation for you. This usually takes variables such as your age, risk tolerance, and expectations into account. The robo-advisor may also utilize popular investment strategies like Efficient Market Hypothesis or Modern Portfolio Theory to craft your customized plan.

Once you make your first deposit, the robo-advisor then invests this money based on its deductions. If terms like “exchange-traded funds” or “mutual funds” sound alien to you, robo-advisors can prove to be invaluable in helping you make wise investments.

Should You Really Automate Your Investments?

Jansen stresses that it’s absolutely crucial for robo-advisor users to know that these services are no substitute for financial planning; they only help with investment management. To truly increase your odds of financial success, you need to be on top of both aspects.

So, what’s the difference? While robo-advisors make decisions on your behalf, financial planning involves an actual human to guide you towards a holistic objective regarding your money. As smart as they are, Jansen argues that robo-advisors cannot give you the personalized attention, education, and accountability that a human can.

Robo-advisors act on your behalf, but they usually don’t provide the context of situations. They can’t protect you from irrational decisions, like selling low, buying high, panicking during an abrupt market plunge, or simply forgetting to contribute to your investments.

Jansen compares it to taking classes at college; you can follow the set curriculum without asking any questions, or you can seek and get the guidance of an academic advisor. Having a human to consult about your tough decisions makes it easier to not only tailor your education to your goals, but you’re also more likely to graduate on time and hit those goals in the future.

The Answer is Circumstancial

Just as with any other technology, using robo-advisors can be a prudent decision in some scenarios. With their accessibility, low cost, and ease of use, they’re wonderful for investors that are just beginning. Jansen says that if you’ve got $25,000 or less to invest, then a robo-advisor isn’t such a bad move. After this, he strongly urges you to consider a financial advisor.

Strangely enough, buy-in price points and index funds can’t give you a complete picture of your finances and goals. Building wealth beyond six figures requires a holistic strategy. Not only that, but you also need experience and intuition to change course when a curve ball comes your way. For now, only human financial advisors can provide this nuanced service.