Since we have not experienced a recession since the advent of the Robo-advisor, it has not been battle tested. The closest comparison we can draw from, is how individuals react who take a DIY approach. The herd mentality is pervasive in behavioral finance. It has taught us that when things look great we should keep buying and when things look bad, we should jump ship. Classic “buy high, sell low” mentality, which can prove harmful over time.

The major role an advisor plays, and a distinct benefit for clients, is a calm and level head…a voice of reason and discipline, especially in uncertain or turbulent times. There is nothing we have seen in the Robo-advisor model that separates fact from fiction to provide the type of real-time advice investors require to prevent poor or emotional decision-making, or reactionary missteps. That type of advice and guidance, aligned with an individual investor’s life goals and risk tolerance, is uniquely human. Positive, long-term financial outcomes are a result of thoughtful and comprehensive planning. Investment strategies and performance are one component of financial/life planning.

Robo advice models are not sophisticated enough to capture these other important inputs and/or the impact of financial decisions made outside of the investment model (Can I afford a vacation home? How do I improve cash flow? Should I pay off my mortgage early? Are my retirement account/non-retirement account allocations in conflict?) that play a critical role in overall outcomes.

 


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