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Real Advisor or Robo-Advisor?

Online Investment | West Palm Beach False Claims Act

In our technologically driven society, there is less and less that can’t be done through a mobile application or website.  Society is becoming accustomed to instant 24/7 access to everything from streaming movies to shopping to playing games to banking and everything in between. So the rising popularity of automated investment tools like online financial calculators and investment management programs comes as no surprise.

Many online financial calculators do little more than provide an objective answer to a mathematical question such as the future value of an amount of money invested now at a specific interest rate, or the final costs of different mortgage options.  These types of online tools provide the user with immediate access to the exact same answer the user would get from a live person performing the calculation.

Some online investment programs, however, go far beyond providing objective numerical information. Online investment management programs, often referred to as robo-advisors, seek to provide investment management services that were once only available from human financial advisors.  It is true that robo-advisors offer some benefits to investors over traditional live advisors such as lower cost, ease of use, and broad access, but it is important to understand the risks and limitations before using them.

What exactly is a robo-advisor? A robo-advisor is an automated investment management service that selects investments based upon a specific asset allocation algorithm.  Robo-advisors utilize demographic and financial information provided by the investor, such as age, employment status, liquid assets, and stated investment objectives, to create a portfolio of investments.  Typically, robo-advisors invest in a selection of stock and bond exchange traded funds (ETFs).   Once the portfolio is selected, the program monitors investment performance and will periodical re-balance the portfolio, things traditionally done by a live financial advisor.

What you should consider before using a robo-advisor?  Robo-advisors are only as accurate as the information provided by the investor.  The questions that the robo-advisor’s tool asks, and how they are worded, may influence the investor’s responses.  If the investor misinterprets a question, the resulting answer may not be an accurate reflection of the investor’s financial situation or goal, resulting in a skewed portfolio recommendation. In addition, a questionnaire may not ask enough questions to accurately assess an investor’s particular circumstance, such as a need to access cash from the account in a year to pay for a child’s wedding, or an unusual tax situation.

As with any investment product or service, investors should do their homework before they invest their hard earned money with anyone.  Information about specific investment advisory firms, including robo-advisors, may be found on the Security and Exchange Commission website.  Information about stockbrokers and brokerage firms may be found on FINRA’s Broker Check site.