Sacrificing Customized Financial Advice on the Altar of "Cheap and Convenient"
Over the holidays, I reviewed a number of robo investment websites and was shocked by the sheer oversimplification of their technological “improvement” to investing.
Here is an example: Their questionnaire for getting to know me and my investment goals consists of two items: How old are you? What is your income?
With only that information, one website distilled my unique investment goals into three strategic options: 1. Safety Net. 2. Retirement. 3. General Investing. That’s it. The most critical financial decision that an investor can make—their portfolio asset allocation—has literally been reduced to these three choices.
Safety Net (3–6 months of expenses): One particular website recommends 40% stocks and 60% bonds. In order to accumulate and maintain safety-net dollars—which most reputable financial planners advise to be kept in zero risk or ultra-low risk strategies—this automated “advisor” would subject these dollars to stock market risk, duration risk and credit risk. Some safety net!
Retirement: The site’s retirement strategy calls for an 80% allocation to stocks and 20% to bonds. First off, how in the world could anyone make such a recommendation without even knowing my current assets, my anticipated retirement date, my spouse’s details, my expected social security receipts and a host of other relevant factors? What if I currently have a serious health issue? What if my job was expected to be eliminated next year? How can anyone justify the volatility of such a portfolio? They didn’t even ask what my reaction was to the last major market downturn, and I can think of dozens of other questions they never asked.
General Investing: Believe it or not, this site recommends 75% in stocks and 25% in bonds. What if I needed to start making tuition payments in two years? They don’t even address options like 529 Plans. What if I were planning to make a down payment on a new home next year? What about an impending marriage or divorce? Apparently, that kind of information is all irrelevant.
In my opinion, this type of financial advice is reckless. The majority of robo websites I reviewed completely ignore the intersection of financial planning and wealth management. You really can’t do one without the other, in my view. For that matter, risk management and estate planning are just as integrated with financial wellbeing as asset allocation. All are connected. And that doesn’t even take into account the most vital factor to accurately determine and monitor: the individual psychology of the investor.
If all this isn’t shaky enough, consider that no two of the robo websites I reviewed agree on how portfolio assets should be allocated. They differ wildly from one another, yet nearly all of them claim to be guided by ivory tower academics and proven algorithms. I would love to see the white paper that supports these simplistic models being the right strategic mix for every investor across all market cycles. Of course, they aren’t and they never could be. Each person is uniquely different—financially, emotionally, intellectually and experientially.
These purported academics appear to be selectively ignoring other academic white papers that attest to the value associated with certain illiquid private and value-oriented investment strategies. Rather, they suggest that all illiquid strategies, regardless of the investor and his or her unique circumstances, temperament and goals, are without merit. I can also think of other liquid strategies that one can only assume have also been eliminated from consideration in the name of simplicity.
I can understand why investors and even some advisors are enamored with this new technology of investment. It may be tempting to justify all the cut corners by saying that robo-investment websites are low cost and expedient. But at what point did our culture succumb to the notion that cheap and easy advice is a viable substitute for individualized answers to complex and interconnected issues like health, legal matters, financial and investment planning and other vitally important areas of our lives?
I am all for cheap when it comes to buying a gallon of gas. But I am also committed to doing it right when it comes to managing my health and finances. Have we as a culture sacrificed wisdom and good counsel on the altar of cheap and convenient? I hope not.
Robo advice is still in its infancy. At some point, its template for automating financial advice may improve. For now, however, it’s a poor substitute for the power of customized human financial advice.