Chances are you have grown accustomed to robots and automation in your day-to-day life, from the googly-eyed bot roaming the aisles of local grocery stores to the automated answering service that greets you when you call your bank. For the sake of efficiency and convenience, most of us have automated more and more of our daily lives.
There are many shades of meaning we can apply to the word automation, but I think the third definition offered by Merriam-Webster captures how it is used in the average person’s life: the “automatically controlled operation of an apparatus, process, or system by mechanical or electronic devices that take the place of human labor.”
In the financial services world, we have begun to find ways to automatically control the operation of many processes and systems — including investing. Often referred to as robo-investors, automated investment advice is provided by services that automatically create and manage an investment portfolio for people.
Automated investment advice works like any online service requiring a sign-up: You first create an account and provide basic details about who you are. Then, you provide further details about your financial status and goals, your income and debt, and your risk tolerance. The robo-advisor — really a digital algorithm — gets to work creating an investment portfolio for you. The service continues to quietly manage your portfolio, without ever involving a human being.
These services tempt new investors with a few features. They require no or low minimum investments to get started, users incur few fees and accounts are available for review any time of day or night and anywhere you can get an Internet connection.
Though it seems to have ridden in on a wave of smartphones and digital banking tools, this technology isn’t new. Financial advisors, wealth managers and financial planners have used automation for portfolio management and automatic rebalancing for nearly 20 years.
So, what is fundamentally different about modern robo-investing? Let’s look back at what we’ve discussed so far: Automation takes “the place of human labor.” Robo-investors manage your investment portfolio “without ever involving a human being.”
In other words, automated investment advice removes the human element in financial planning.
Notably, some automated investment advice services offer “premium” packages that provide access to human financial advisors. Offering this as a service for higher-priced accounts belies the value we all — even robo-advisor services — place on the human element in critical decision-making. There are few decisions we weigh more carefully than where and how to spend and grow our hard-earned money.
When you eliminate human interaction in investing and only look at the process through robo-investing, we see what is lacking is the human touch. Financial advisors not only have a wealth of experience to draw on, but they can help individual investors overcome irrational thinking or make better decisions. Put simply, the ability to sit with somebody and receive a thoughtful check on your emotions is valuable. In fact, it is as valuable as the fundamental computer-based investment models.
Often, investors make decisions psychologically, not with perfect logic, and it's those decisions that typically get investors into trouble with their overall rate of return. Many studies have shown that investors typically sell during a panic and will not buy when they are afraid, thus reducing rates of return dramatically. A good financial advisor will help a client handle the tough times. They will use the entry points provided by down markets to add to the overall portfolio in a timely manner.
Also, in my more than 30 years in the financial services business, I have found that part of being a good advisor is listening. Clients sometimes have issues on their minds such as how they're going to fund their children’s education, a job loss, a home improvement project, early retirement or a layoff. Sometimes, they just want to talk about these things, and talking through a financial problem sometimes makes the client feel better — even if I can’t offer a perfect solution. It would be my opinion that when clients feel good, they perform better as investors, and when clients don't feel good, they're subject to making more mistakes or poor financial choices.
Finally, investing cannot be treated as a standalone financial choice. It must dovetail with a well-established savings habit and protection in the form of life insurance. A financial planning professional can also help people dial in this mix of approaches until they arrive at a solution that works for the individual. Financial well-being and the growth of generational wealth requires a plan.
Automated investment advice has its place in our modern word. But most people should work with a financial planner or advisor if they want to build a financially stable future and grow wealth for their families for years to come.
Rich Wesselt is a Financial Wealth Planner helping individuals and families build and manage Generational Wealth. A long-time resident of the Norristown area, Rich graduated from Bishop Kenrick High School and attended the University of Pennsylvania, where he received a Bachelor of Science degree in Economics from the Wharton School. Rich is also a member of Top of the Table, an exclusive group within the Million Dollar Roundtable, a leading industry association.
With more than 30 years of experience in the financial services industry, Rich brings a wealth of knowledge to help his clients plan for a secure financial future. As principal of the Wesselt Capital Group, Rich uses a relationship-driven, individual approach to macroeconomic planning. He works creatively with each client to address the appropriate investment, savings and protection programs that fit their needs and presents a financial blueprint that is unique to their personal goals and objectives. Rich holds his FINRA Series 6 Registration.