3 Reasons Humans Trump Robo-Advisors in Retirement Planning

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Over the past decade, “robo-advisors” have changed capital markets by making investing simpler, cheaper and more accessible. These online platforms provide investors with computer-generated financial planning and investment services, typically at low costs, with little or no human intervention. Examples of these platforms include Betterment, Wealthfront and FutureAdvisor.

Also known as automated investment advisors, these digital advice platforms usually start with a questionnaire to gauge risk tolerance, investment horizon, and return expectations, then uses algorithms to suggest investments.

Robo-advisors are high-tech and cool, but they weren’t designed to plan for retirement. Most of them can’t tell you the optimal strategy for drawdown when it’s time to withdraw that money for use. Mismanagement here can lead to tax liabilities that erase decades of gains.

You have to consider who these programs were written to serve. If you have little to lose and not much complexity to your investment strategy, a digital advice platform may be a great way to dip a toe into equity capital markets. For people looking to save for retirement however, a human advisor may be a smarter choice. Here are three reasons why we think so: 

·      Investing is only a small component of retirement planning. Most of us will start families, create businesses, and experience various changes throughout our lives—all of which affect how we should invest. If you just had a baby, for example, you might have to factor a college fund into your investment strategy. In addition to product suggestions, you may need clarity, guidance, and even emotional support from your financial advisor.

A robot can’t provide any of those things, nor can it offer advice on non-financial goals. The program just assumes you know what is best for you, and will base its suggestion on your inputs. That means you miss out on the insight of somebody who can draw from personal experience and working with other clients. An expert could bring your attention to factors you hadn’t considered, and tell you how to correct for them. 

·      The majority of financial mistakes are made by individual investors. During every past financial crisis in this country, we’ve witnessed how people panic in periods of uncertainty. For example, when markets go through a correction period, people often react to temporary losses with irrational, knee-jerk choices. These blunders can destroy financial futures, as well as the ability for people to enjoy their retirement years. While robo-advisors can make suggestions for trades, you are the one who ultimately executes on them. That means you won’t have a seasoned professional to stop you from acting against your interests. 

·      Retirement planning isn’t that simple. Many of these digital platforms ask you to answer a few simple questions, then generate a “customized” boilerplate investment strategy. In our experience, there are many variables to consider when developing a comprehensive retirement plan. It’s unrealistic to expect the same quality of results with a questionnaire that oversimplifies complex questions requiring sophisticated answers. For example, assessing risk tolerance requires more nuance than can be summarized in a multiple-choice answer.

While robo-advisors may be fine for some, planning for retirement is serious business. Most people will be better off with a trained human being who is powered by experience and instinct, rather than a machine programmed to spit out platitudes.